Free Guide to Becoming a Contractor

Understanding What It Means to Be a Contractor

A contractor is a person or business that agrees to perform work or provide services for another person or company under a specific agreement. Unlike employees who work for one company and receive regular paychecks, contractors work independently and typically serve multiple clients. This guide explains the basic framework of contracting work and the differences between being a contractor and being an employee.

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The key distinction between contractors and employees matters for taxes, legal responsibilities, and how you receive payment. When you are an employee, your employer handles tax withholding, provides benefits like health insurance, and is responsible for workers' compensation. As a contractor, you handle your own taxes, find your own benefits, and are responsible for certain legal protections on your own.

Contractors work in nearly every field. Construction contractors build homes and businesses. Plumbing, electrical, and HVAC contractors provide specialized services. Writing, graphic design, and web development contractors offer professional services. Consulting contractors advise businesses on strategy, marketing, or operations. Cleaning services, landscaping, and handyman work are also common contracting fields. Your skills, interests, and available time determine what type of contracting work suits you.

The contract itself is a written or sometimes verbal agreement between you and the client that describes the work, the price, and when payment is due. Some contracts are simple one-page documents for a single project. Others are detailed agreements covering months or years of ongoing work. Understanding contracts protects both you and your client by making expectations clear.

Practical Takeaway: Before starting as a contractor, identify what services or skills you can offer, research what contractors in your field typically charge, and understand that you will be responsible for your own taxes, insurance, and business expenses.

Legal Requirements and Business Structure

Operating as a contractor involves legal requirements that vary by location, industry, and the type of work you perform. Every contractor must understand federal tax obligations, and many need state and local licenses or permits. This section explains the main legal considerations for starting a contracting business.

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First, you need a business structure. The simplest option is a sole proprietorship, where you are the only owner and operate under your own name or a business name you choose. This requires minimal paperwork—often just registering your business name with your state or county. A sole proprietorship is easy to start, but you have unlimited personal liability, meaning if someone sues your business, they can pursue your personal assets.

A Limited Liability Company (LLC) is another common structure. An LLC separates your personal assets from your business assets, protecting your home and personal savings if someone sues your business. Setting up an LLC requires filing paperwork with your state, paying a filing fee (typically between $50 and $500 depending on your state), and creating an operating agreement. Many contractors choose an LLC for this liability protection.

A Subchapter S Corporation (S-Corp) or C Corporation offers additional liability protection but involves more complex paperwork and ongoing compliance. Most new contractors start with a sole proprietorship or LLC rather than a corporation.

You will need an Employer Identification Number (EIN) from the Internal Revenue Service, even if you have no employees. An EIN is a nine-digit number that identifies your business for tax purposes. You can obtain one free from the IRS website in minutes. You will use your EIN on tax forms, business licenses, and bank accounts.

Licensing requirements depend on your field and location. Construction trades like electrical work, plumbing, and HVAC typically require state licensing with exams and documented work hours. Other fields like cleaning services, landscaping, or consulting may not require licenses but may need business permits from your city or county. Before starting, research your state's and local government's websites to learn what licenses or permits your specific work requires.

Insurance is a legal protection, not always a legal requirement, but many clients require it. General liability insurance protects you if someone is injured or their property is damaged because of your work. Workers' compensation insurance is legally required in most states if you hire employees. Tools and equipment insurance protects your business assets. The cost of insurance varies widely based on your industry and location—a contractor might pay $500 to $3,000 per year depending on the type of work.

Practical Takeaway: Choose a business structure (most new contractors use an LLC or sole proprietorship), register your business name with your state or county, get an EIN from the IRS, research your state and local licensing requirements, and obtain the insurance your clients require.

Understanding Taxes and Financial Management

Contractors pay taxes differently than employees. An employee receives a paycheck with taxes already removed by their employer. A contractor receives full payment and is responsible for calculating and paying all taxes themselves. This section explains how contractor taxes work and how to organize your finances.

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Contractors pay two main categories of taxes: income tax and self-employment tax. Income tax is based on your profit after business expenses—the money you earn minus what you spent on the business. The federal income tax rate depends on your total income and filing status, ranging from 10% to 37% in 2024. Your state may also charge income tax.

Self-employment tax covers Social Security and Medicare contributions. Employees and employers each pay 7.65% toward these programs; contractors pay both portions, totaling 15.3% of net earnings. For example, if you earn $50,000 in net profit, you would owe approximately $7,065 in self-employment tax plus your income tax.

You must make estimated tax payments quarterly—on April 15, June 15, September 15, and January 15. These payments prevent penalties and interest charges. To calculate estimated taxes, the IRS provides worksheets and forms on their website. Many contractors work with an accountant or use tax software to handle these calculations.

Keeping detailed financial records is essential. Track every dollar you earn and every business expense. Record client names, project dates, and payment amounts. Save receipts for business supplies, equipment, fuel, phone bills, office space rent, and other expenses. These records prove your income and expenses if the IRS audits you and help you understand whether your business is profitable.

Business expenses reduce your taxable income, lowering your tax bill. Common deductible expenses include supplies and materials, equipment and tools, vehicle expenses (either mileage or actual fuel and maintenance), home office space, phone and internet bills, insurance, licensing fees, and professional development. You cannot deduct personal expenses—food you eat at home is not deductible, but meals while traveling for business work may be. Keep records and understand which expenses are legitimate business costs.

Many contractors use accounting software like QuickBooks, FreshBooks, or Wave (which offers a free version) to track income and expenses throughout the year. These tools generate reports showing your profit or loss, making tax time simpler. You can also hire an accountant to manage your bookkeeping and prepare your tax return, which typically costs $500 to $2,500 per year depending on complexity.

Practical Takeaway: Set aside 25% to 35% of each payment you receive for taxes, keep detailed records of all income and business expenses, make quarterly estimated tax payments, and use accounting software or hire an accountant to organize your finances.

Finding Clients and Building Your Reputation

Starting a contracting business means finding people or companies willing to pay you for your work. This section explains practical methods for finding clients, pricing your services, and building a reputation that brings repeat business.

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Word-of-mouth referrals are the most common way contractors find clients. Tell friends, family, and former colleagues that you are starting a business. Ask satisfied clients for referrals and offer a small discount if they refer new customers. A construction contractor might offer $50 off the next job for a successful referral. This method costs nothing but requires doing excellent work that makes clients want to recommend you.

Building an online presence helps clients find you. A simple website or social media page describing your services, showing photos of completed work, and providing contact information takes several hours to create. You can build a basic website using free or low-cost tools like WordPress, Wix, or Squarespace for $5 to $20 per month. Include your service area, types of projects you handle, and customer testimonials if you have them.

Online directories and platforms connect contractors with clients. Google Business Profile (free) lists your business on Google Maps and search results. TaskRabbit, Fiverr, and