Independent Contractor License Requirements in the US
This guide breaks down what you need to know to start and operate your contracting business, get your independent contractor license and stay compliant in the US.
Freelancing and independent contracting are on the rise. Nearly 36% of the US workforce identifies as independent workers. If you’re thinking about going solo, there’s more to it than just finding clients.
Setting up your business the right way both legally and financially can make all the difference in your long-term success.
Let’s understand how:
Independent Contractor or Employee: What’s the Difference?
Before you start, it’s important to understand where you stand legally. Misclassifying your work status can result in tax penalties, fines, and legal action. Therefore, it is important to know the difference.
- Employees work under a company’s rules. They follow set schedules and get benefits like health insurance and paid time off. Their employer also handles tax withholdings, Social Security, and Medicare contributions.
- Independent Contractors operate as their own business. They set their own hours, negotiate their own rates, and handle their own taxes.
Clients pay them directly, and they receive Form 1099-NEC instead of a W-2. They must also cover their own Social Security and Medicare taxes — commonly known as self-employment tax.
Quick Glance: Key Differences
Aspect | Employee | Independent Contractor |
Work Schedule | Set by employer, full time employee hours | Controlled by contractor |
Tax Withholding | Employer deducts | Contractor responsibility to pay self employment taxes |
Benefits | Health insurance, PTO and employee benefits | No employer-provided benefits |
Job Security | More stable | Dependent on client base |
Tools & Equipment | Provided by employer | Paid for by contractor |
Legal Protections | Covered by labor state laws | Must negotiate own contracts |
Pros and Cons of Being an Independent Contractor
The Pros:
- You’re the boss: Choose your clients, set your rates, and work when you want.
- Unlimited earning potential: No salary cap, earn as much as your workload allows.
- Tax deductions: Business expenses like home office, software and travel can lower your taxable income.
- Diverse income streams: Work with multiple clients instead of relying on one employer.
- Flexibility: Set your schedule and work from anywhere.
The Cons:
- No employer benefits: You’re on your own for health insurance and retirement savings.
- Self-employment taxes: You cover both the employer and employee portions of Social Security and Medicare taxes.
- Inconsistent income: No steady paycheck means financial ups and downs.
- Admin work: Managing contracts, invoicing, bookkeeping, and compliance is all on you.
Pro Tip: Save time on invoicing and get paid faster with our Invoice Maker. Automate invoice creation, set up recurring payments, and track transactions all in one place.
How to Become an Independent Contractor: Step-by-Step Guide
1. Choose & Register Your Business Name
Choosing a strong business name is more than just branding. It can impact your credibility and legal standing, too. Your business name should be unique, relevant to your industry, and easy to remember.
Pro Tip: Before settling on a name, conduct a search in your state’s business registry to ensure it’s available.
If you plan to use a name other than your legal name, you must register a Doing Business As (DBA). Some states may also require you to publish your DBA in a local newspaper.
Registering your business name lets you open a business bank account, sign contracts, and operate under a professional identity.
2. Choose a Business Structure
Your business structure determines how you pay taxes, your level of liability, and how your business is perceived legally.
- Sole Proprietorship: The simplest and most common business structure for independent contractors. It requires no formal registration, making it easy to start. However, it does not offer liability protection. This means your personal assets could be at risk if your business faces legal action.
- Limited Liability Company (LLC): Provides liability protection by separating personal and business assets. It also offers flexible tax options. You can choose to be taxed as a sole proprietor or an S-Corp.
- S-Corporation: A more complex structure that can help reduce self-employment taxes. S-Corps let owners pay themselves a salary and take distributions. This can lower the amount that is subject to self-employment tax. However, it requires more paperwork and administrative effort, including payroll setup and compliance with corporate formalities.
- C-Corporation: Rarely used by independent contractors but may be beneficial for those planning to expand significantly. C-Corps face double taxation (corporate tax and personal tax on dividends) but offer the strongest liability protection.
3. Apply for a Federal Income Tax ID (EIN)
An Employer Identification Number (EIN) is essential for tax filing and opening a business bank account. The EIN acts as your business’s Social Security number. Businesses that plan to hire employees, open business credit accounts, or operate as an LLC or corporation need this.
Even if you’re a sole proprietor, having an EIN can help separate personal and business finances and tax purposes.
3.1 How to Apply for an EIN
- Online: Most times this is the fastest and easiest method. Approval is instant through the IRS website.
- By Mail or Fax: Submit IRS Form SS-4; processing times can take several weeks.
- By Phone (International Applicants Only): Call the IRS Business & Specialty Tax Line.
4. Get the Independent Contractor License
Licensing rules vary by state and industry. Check the SBA’s State License Database for specifics.
Common License Requirements:
- General Business License: Most states require this for operation.
- Professional Licenses: Necessary for regulated professions like electricians and accountants.
- Home Occupation Permit: If running a business from home.
- Sales Tax Permit: Required if selling taxable goods or services.
5. Open a Business Bank Account
A business bank account keeps personal and business finances separate, making tax filing easier.
6. Set Up a Way to Receive Payments (1099-NEC Form)
Clients must issue a Form 1099-NEC for payments over $600 per year. Using Invoice Maker streamlines invoicing and payment tracking.
7. Prepare to File Taxes as an Independent Contractor
- File Form 1040 with Schedule C – Reports business income and deductions.
- Pay Estimated Taxes Quarterly – Required if you owe more than $1,000 in a tax year.
- Deduct Business Expenses – Reduce taxable income by claiming office, travel, and supply costs.
- Use Accounting Software – Tools like QuickBooks help track tax obligations and cash flow.
Can Non-US Citizens Be an Independent Contractor?
Yes, but they need proper authorization. Foreign contractors working remotely for US clients must submit Form W-8BEN to verify their tax status.
How to Thrive as an Independent Contractor?
1. Stay Organized with Business Tools
Managing multiple clients, projects, and deadlines requires efficient organization. Instead of using spreadsheets and sticky notes, try Invoice Fly’s Client Portal. It helps you track client interactions, project statuses, and invoices all in one place.
2. Use Professional Invoicing & Payment Software
Simplify billing and track payments with Invoice Maker.
3. Build Strong Client Relationships
- Draft clear contracts with payment terms and project scope.
- Communicate regularly to maintain trust.
- Deliver high-quality work to encourage referrals and repeat business.
4. Market Your Services
Use LinkedIn, freelance platforms, and a personal website to attract clients.
Depending on your industry, specialized platforms like Upwork or Fiverr can help you connect with potential customers.
If you’re in a creative field, having a strong portfolio on sites like Behance or Dribbble can showcase your work.
Additionally, optimizing your personal website for SEO and leveraging client testimonials can set you apart from competitors.
5. Secure Business Insurance
Unexpected legal or financial issues can arise at any time, making business insurance an important safeguard. Depending on your industry and type of business, you may need different types of coverage:
- General Liability Insurance – Protects against client lawsuits, accidents, and property damage.
- Professional Liability Insurance (Errors & Omissions Insurance) – Covers legal costs if a client claims your services caused them financial harm.
- Cyber Liability Insurance – Important for freelancers handling sensitive client data or working online.
- Business Property Insurance – Covers equipment, office spaces, or inventory in case of damage or theft.
6. Stay Tax Compliant
- Set aside 25-30% of earnings for taxes.
- Work with a CPA to optimize deductions and minimize liabilities.
How Can Invoice Fly Help You Become a Small Business Owner
Becoming an independent contractor could be the next step for your sustainable future. You have the freedom to choose your clients, set your rates, and work on your own terms.
But that freedom comes with responsibility. The paperwork, the taxes and the client management. It can all pile up if you’re not prepared.
With tools like Invoice Fly’s Invoice Maker, Online Payments and Client Portal, you can easily stay on top of your workload. Keep client interactions organized and ensure your invoices don’t get lost in the shuffle.
Investing in the right systems now will pay off in the long run. Becoming an independent contractor is all about building a business that works for you… not the other way around.
