Do I need a business license as an independent contractor?
What is an independent contractor?
An independent contractor is a self-employed individual who performs services for clients for a predetermined fee. They may have an ongoing relationship with a business, or just for the duration of a project.
Independent contractors might refer to themselves as self-employed, freelancers, 1099 workers, or gig workers. The terms really mean the same thing as far as the law and taxes are concerned.
Independent contractors receive a 1099 tax form from their employers instead of a W-2 form. They are responsible for paying their own income taxes, including their own Medicare and Social Security contributions (also called the self-employment tax).
They don’t get the same benefits that full-time employees receive, such as health insurance, a retirement plan, unemployment insurance, and payroll tax withholding.
What’s the difference between independent contractors and sole proprietors?
Independent contractors are similar to sole proprietors, because they don’t register their business as a separate, legal entity apart from themselves. The terms are somewhat interchangeable.
Both sole proprietors and independent contractors earn money from the products or services they sell. The term independent contractor implies a relationship between the individual and a client who employs them on a temporary or per-project basis.
With independent contractors and sole proprietors, their personal assets and business assets are essentially the same thing. Any debts, lawsuits, or liabilities against their business are also levied against the independent contractor or sole proprietor.
What about LLCs and S corps?
With a limited liability company (LLC) or an S corporation, you could separate your personal liabilities and finances from those of your business. This involves filing paperwork with the secretary of state office where your business is located.
LLCs and S corps are similar, as they offer some liability protection for owners. The owners can also treat company profits as pass-through income on their tax returns.
LLCs are typically formed by individuals or partnerships and require less paperwork. S corps usually have more members. They also must have a board of directors, hold shareholder meetings, and fully document their activities.
S corps must report their earnings and file tax federal tax returns, although they are largely exempt from corporate income taxes.
Does a 1099 contractor need a business license?
Whether you need a business license as an independent contractor depends on your state and local laws.
Your local county or city government may require a general business license, a business tax certificate, or a tax registration certificate. They all refer to the same thing—a legal document that allows you run your own business operations in your area.
In some areas, you might not need a business license if you’re doing business as yourself, in your own name, although you should check with your local authorities to make sure. Your local chamber of commerce, or your county or city clerk’s office, would be a good place to find information on what’s required and the license application process.
If your work is federally regulated, you may need a license from a federal agency
If you run a business out of your home and have frequent visitors, you ought to verify if this is allowed under local zoning laws. You could also check on your state’s licensing requirements through your local secretary of state’s office, your state’s department of revenue, or CityApplications.com.
If you sell goods or services to the public, you may need a sales tax permit. You would have to collect and pay any applicable sales taxes or business taxes as well. The Internal Revenue Service requires independent contractors and self-employed individuals to report and pay self-employment taxes on net income of more than $400 per year.
The IRS also requires independent contractors and sole proprietors to file a Schedule C (Form 1040) report on their income and losses if their business operations are a for-profit activity that they regularly engage in, even on a part-time basis.
If your work is federally regulated, you may need a license from a federal agency. This may include agriculture, alcoholic beverages, or transportation. You can check with the U.S. Small Business Administration (SBA) for more information on federal licensing for small business owners.
Do independent contractors need professional licensing?
In addition to the business licensing requirements mentioned above, your state may have licensing requirements for your profession.
In these fields, the licensing requirements depend on the types of projects you work on, how expensive they are, and where you work.
Each state has their own regulations that impact your licensing and registration requirements, such as:
- California requires both licensing and registration to work on construction projects worth more than $500. There are four types of licenses available, depending on the work being done.
- Georgia, on the other hand, requires licensing and registration for construction projects worth $2,500 or more. There are four types of licenses available.
- Texas doesn’t require licenses for general contractors, although a contractor’s license is required by some city and county governments. The state does require licenses for electricians, plumbers, and HVAC technicians.
- Florida requires general contractors to be licensed, with multiple types of licenses available depending on the size and location of the projects.
Do contractors need business insurance to get licensed?
Your need for insurance as an independent contractor depends on your profession and the laws in your state. You might also need certain types of insurance to qualify for contracts.
Insurance is typically required for those in the building trades, either to get a license or a permit to work. For example, California requires licensed general contractors to have either a surety bond or a cash deposit of $15,000.
Most states require workers’ compensation insurance for any business that has employees. It may also be required for independent contractors in riskier professions within the building trades.
For example, California requires any contractor to have workers’ comp insurance or a valid Certification of Self-Insurance if they have a license to work in HVAC, asbestos abatement, roofing, or tree servicing.
You might also need workers’ comp coverage to qualify for contracts, as some businesses require independent contractors and the self-employed to carry their own insurance.
Even when not required by law or contracts, many independent contractors still buy insurance for the financial protection it offers.
For example, workers’ comp insurance can help with your medical bills and lost wages if a work-related accident keeps you from working for a while. Your regular health insurance is unlikely to cover a work-related mishap.
License and permit bonds
Outside of the construction industry, any local government you do business with might require a surety bond, or a license and permit bond, that serves as a financial guarantee of your work.
Professional liability/E&O/malpractice insurance
Many states require professional liability insurance to obtain a license as an accountant, architect, consultant, or engineer. This coverage is also known as errors and omissions insurance (E&O) among IT professionals, insurance agents, real estate agents and brokers.
General liability insurance
Many small business owners buy general liability insurance. It covers common business risks such as customer injuries, damage to a customer’s property, and advertising injuries. This coverage might also be required for you to qualify for contracts.
If you use any type of vehicle for work, you’ll need some type of car insurance. Most states require commercial auto insurance for business-owned vehicles.
Hired and non-owned auto insurance (HNOA) would cover any personal, leased, or rented vehicles use for work. Your personal auto insurance is unlikely to cover you for a work-related accident.
How do I get a business license?
The first step to obtaining a business license is to find out if a business license is required by your state or local government, along with any professional license. Your next steps to obtaining a business license are:
- Choose your business name and structure
If you’re required to obtain a business license, you’ll have to choose the name and structure of your business. As outlined above, you have many options for the type of business you form.
Most independent contractors opt for a sole proprietorship in their own name. Other than a business license, it doesn’t require any additional paperwork to do business as yourself, so it’s much easier than forming a partnership or an LLC.
- Obtain an Employer Identification Number
If you’re operating as a sole proprietor/independent contractor, you’ll list your business income on your personal income tax return.
If you have a “doing business as” (DBA) name for your business, form a partnership, or any other type of formal business structure, you’ll need a free Employer Identification Number from the IRS.
The EIN, also known as a Federal Tax Identification Number, is like a Social Security number for your business that you will need to open a bank account and to file taxes for your business. You’ll need to provide information such as your type of business, your revenue expectations, and contact information.
- Gather your business info
When applying for a business license, you may be asked to provide the following information:
- Your EIN
- Your business's name, ownership information, and its legal structure
- A valid government-issued identification, such as a driver’s license
- Your business's address and square footage
- A description of your business activity, such as the products and services you offer
- Fill out the forms and pay the fee
If you need a business license from your state, your state’s secretary of state’s office, its department of revenue, or Cityapplications.com can help you find the forms you need and any applicable fees.
If you need a license from your local county or municipal government, your city or county clerk’s office can point you in the right direction.
What penalties can contractors face for not having a business license?
If you’re required to obtain a business license, failing to do so can result in fines, penalties, and even the closing of your business. This can also happen if you fail to renew your business license when required.
The penalties you face could be a flat fee, or a percentage of your income based on how much you earned during your period of noncompliance.
For example, Chicago requires a license to do business in the city. Violating this ordinance could result in fines of $250 to $500 for each day of noncompliance, along with the forced shutdown of a business until a license is acquired. Violating a closure order could bring fines of $500 to $1,000 per day.
Other risks include a lawsuit from a competitor or angry customer, a loss of reputation, and losing the ability to bid on government contracts and new business.
How do I get contractor business insurance?
Mike Mosser, Content Specialist
Mike spent several years as a reporter and editor covering politics, crime, and the world financial markets. He’s worked for several newspapers, a financial newswire, and a monthly magazine. As a copywriter, Mike has produced SEO-based content, marketing, public relations, and advertising work for a variety of companies.