Does an independent contractor need a business license?
Apr 12, 2023
Before 2020, working for one employer on a full-time basis was considered the norm. So was hearing terms like “S-corp,” “C-corp,” “LLC,” and other, similar designations traditional companies registered themselves as when they applied to their state department for a business license.
Now, that’s all changed: according to a McKinsey study, in 2022, 58 million Americans—equivalent to about 36% of the workforce—identified themselves as independent contractors. This is a nearly 10% jump from self-employed workers who made up the gig economy in 2016, according to the same survey.
There are many benefits to working as an independent contractor. Not only do you have the freedom to set your schedule and, often, work remotely from wherever you wish, but you can sometimes earn more money before taxes—and you get to be your own boss.
However, it’s also fraught with complexities. For instance, what exactly do the terms “independent contractor” and “1099 contractor” mean in the eyes of the law? And, if you’re working as an independent contractor in the US, do you need a business license? What if you’re a citizen of another nation?
Here, we’ll address some common questions about independent contractor business licenses, as well as the basic steps you should take to set yourself up as a self-employed worker, and more.
FAQs about independent contractor business licenses, 1099 contractors, and more for US citizens
Understanding the definitions of the terms “independent contractor,” “1099 contractor,” and “business license” is incredibly helpful for self-employed individuals looking to navigate the complex world of correctly classifying themselves for legal and tax purposes.
Before you set up your business and start your new career, here are some frequently asked questions about these terms—as well as other aspects of working in the United States as a self-employed individual you should know.
Q: What’s the difference between an independent contractor and a 1099 contractor?
Simply put, “independent contractor” and “1099 contractor” are terms that are used interchangeably to refer to the same thing: a self-employed individual who provides paid services to a company without being a full-time employee of that business.
The “1099” designation refers to the tax forms you’ll fill out that will be submitted to the IRS to correctly identify the nature of your work, so they know you owe self-employment taxes to them. When you’re getting started with a new company, Rippling can help ensure you’re classified correctly in the eyes of the government—to ensure the company isn’t penalized.
Q. Does an independent contractor need a business license?
The short answer: It depends on where you live. The majority of states do not require independent contractors to obtain business licenses to operate, but your particular city, municipality, or country may have different rules.
However, there are two major exceptions to this rule: Alaska and Washington both require anyone running a business —including independent contractors—to apply for business licenses through the appropriate channels.
Additionally, some states have rules requiring individuals—even those running one-man, at-home operations—to apply for a local business license.
To be safe, check with the proper local department. At times, it can be tough to find out exactly who’s in charge of this: sometimes it’s the city clerk, while others put this under the purview of the planning and zoning department or the city tax office. Start by talking to your local Chamber of Commerce so you don’t waste hours making a million calls only to find out it’s another dead end. Don’t skip this step, either. You don’t want to find yourself facing penalties and fines from your city or county that you could have avoided.
Q. Why do I get mixed answers when I search “independent contractor business license” online?
Sometimes, the internet isn’t sure whether you’re referring to yourself as a self-employed gig worker (for example, a freelance writer, self-employed graphic designer, and so on) or whether you’re talking about a building contractor. In the latter case, you need specific licenses, certifications, and other, official documentation before you start working on a project for safety and legal reasons, among others. You also need the proper licenses and certifications if you’re a self-employed real estate agent or nurse. Don’t panic. Just read through carefully and make sure you’re looking at information that applies to your profession.
Independent contractor 101: 5 steps to get you started
Now that you’re aware of the requirements surrounding independent contractor business licenses, here are the five steps you should follow to get started in your new career as a self-employed individual.
Step 1: Create a website and update your LinkedIn profile page
Once you decide what kinds of services you’re offering, spend time creating a personal website and updating your LinkedIn page that reflects your expertise and service offerings. Particularly for self-employed individuals who work in creative professions, like graphic design, marketing, copywriting, and so on, each prospective client will ask to see a portfolio of your past work. Your website is the perfect place to reflect this, and there are plenty of free or low-cost site builders available that allow even inexperienced web designers to create pages that showcase their abilities and the projects they’re most proud of.
Make sure both your web page and your LinkedIn are SEO-friendly—that is, they contain the right keywords so you’ll show up when potential clients search to see who’s available for jobs your expertise will fit.
One further recommendation: Don’t try to make your LinkedIn your portfolio. It’s not meant for that, even according to professionals who write for LinkedIn. The website can’t properly host videos, graphic design samples, or even writing samples in the same organized way a dedicated portfolio site does, and it’s best for static documents such as a resume – things you won’t change often. Instead, include a link to your portfolio on your LinkedIn page in a place where it’s easy to find.
Step 2: Set your rates
Whether you’ve just started freelancing or have prior experience, one question you should always be prepared for in an interview with a prospective client is your rates.
This can be a tricky question to answer, even for the most experienced person. If you ask for too little, you’ll find yourself working extremely hard for far less than you deserve. Ask for too much, and you might wind up losing the job because you’re far outside what’s considered a reasonable rate for the services you provide.
Do research beforehand on the regular market rate for the work you do. Then, decide whether you charge by the hour, per project, or whether you offer a monthly rate to employers who are looking to work with you regularly. Each has its pros and cons.
If you decide to charge by the hour, you’ll be paid for the exact amount of work you do, which can be extremely helpful if you are working on a big project or with a new client and aren’t sure how much time you’ll be putting in. On the other hand, if you work very efficiently, you may not make as much working per hour as you would if you charged per project.
Charging a flat rate is great for people who work efficiently and for ensuring clients know the cost of the work ahead of time and aren’t surprised by the final invoice. A con of charging a flat rate? You might get clients who are put off by a big number and who go elsewhere looking for someone “cheaper.”
Before you decide, consider the scope of the project you’re working on, whether the client is new, and what’s worked for you in the past. Whichever option you select, have your rates in mind before you start interviewing.
Step 3: Perfect your pitch
Whether you apply to freelance jobs through websites or cold-email a few companies you’d like to work for, you need to hone your elevator pitch first. Spend some time crafting a short paragraph (that can be both written or given during an in-person call) that clearly explains who you are, what you do, and what kind of work you’re looking for, as well as the benefits you’ll bring to the position. Furthermore, make sure you research each company carefully so you can tailor your pitch to their needs and values.
One further note: If you go the cold-email route, be extra diligent in your research and make sure you email the right person. It’s best to be able to address a specific person by name: the old “to whom it may concern,” is a thing of the past—the internet has made it much easier to find out who holds which role, and people tend to ignore emails that aren’t specifically addressed to them.
Step 4: Network, network, network
You need to get your name out there, and networking is one of the most effective ways to market yourself. Join online forums with fellow freelancers who offer similar services, and take part in their conversations. Make sure you get to know them as people and focus on sharing information, not just on asking for leads for jobs. By becoming a respected, well-known part of the community, leads will gradually start coming your way.
Additionally, find online groups that are relevant to your industry, add companies to your LinkedIn profile that you’d particularly like to work for, and focus on letting people get to know you in addition to keeping an eye out for open positions.
Step 5: Set up a bank account and keep detailed records of all payments you receive
Remember: As a freelancer, you’re responsible for paying taxes to the IRS—since you’re not classified as a full-time employee, your client won’t be doing this for you (and the Internal Revenue Service doesn’t look kindly on people who try to hide money, or who simply make an honest mistake and forget to report something).
Some independent contractors find it easier to set up a separate checking account just for business purposes, while others use their regular checking account but keep detailed written or digital records. While you can pay your estimated self-employment taxes during the regular tax season once a year, it’s in your best interest to pay them quarterly (January 15, April 15, June 15, and September 15) to avoid owing a large amount of money at the end of the year.
Foreign self-employed workers and independent contractor business licenses
The pandemic resulted in the explosion of the gig economy and made remote work arrangements a common way to do business. It also allowed companies to look for and hire talent anywhere in the world; similarly, freelancers could now seek out the right job in any country, not just their own.
Hiring a foreign independent contractor legally and compliantly
For companies, there are numerous benefits to hiring an independent contractor based outside the US. Not only can companies access a wider range of skills find the best person for the job, but currency exchange rates and low labor costs often make it fiscally advantageous for American companies to look outside their nation.
However, to avoid penalties, fees, and other legal issues, it’s crucial for companies (and contractors) to be wise to the labor laws of both the US and the nation the independent contractor lives in. In our guide, you can learn more about how companies can legally hire independent contractors around the world.
Do foreign independent contractors need business licenses?
Just like American independent contractors, both foreign freelancers and the companies who hire them often wonder if the former needs a business license to operate as an independent contractor. The short answer? The rules vary from country to country. It’s crucial to look up the laws of the nation the independent contractor hails from, as well as those of the country the company is located in.
Here’s a short list of information about the necessity of independent contractor business licenses for freelancers who are from some nations that commonly work with the US:
- Canada: Generally, as long as the independent contractor operates their business from home and does not see clients, no business license is necessary. However, other documentation and paperwork may be required, depending on what kind of business you run and where it’s located. Check with the Canada Revenue Agency first.
- Australia: Yes. Independent contractors need to apply for an Australian Business Number (ABN), pay the correct taxes, register for separate business taxes, and understand what their fiscal responsibilities are.
- India: Generally, Indian independent contractors do not need a business license or any kind of registration paperwork.
- Mexico: Many non-Mexican citizens move to Mexico to work as freelancers for US-based companies—on tourist visas, and without a business license. The laws surrounding Mexican citizens who are independent contractors are less well understood. You need to do your due diligence in researching the Mexican laws that govern whether or not the worker is considered a contractor or an employee.
- Philippines: Yes. Filipinos who want to work as independent contractors need to register as such, as well as obtain a taxpayer identification number (TIN) and a Department of Trade and Industry (DTI) certificate.
- Brazil: As long as you’re not subject to the regulations of any of the clients you work for, you’re free to work as an independent contractor in Brazil without a business license.
- Ukraine: Yes, a business license is necessary. Generally, Ukrainian freelancers set themselves up as an “Individual Entrepreneur” (or FOP) and need to fill out the necessary paperwork and tax documents to get started.
Just as it’s crucial for independent contractors to meet any legal requirements necessary to set themselves up as freelancers, the company needs to make sure to classify new hires correctly. Misclassifying an employee as a contractor—or vice versa—can result in fines and penalties.
Rippling’s 90-second quiz can help companies correctly classify a new worker—whether they’re a foreign independent contractor or a US citizen.
To learn more about how we can help you hire, onboard, and manage your global workforce, schedule a demo with Rippling today.
Rippling and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any related activities or transactions.