Why Should I Create an Independent Contracting Business?

Maybe you have taken a job as a contractor within the company where you used to be an employee. Or maybe you were hired as an independent contractor to do work for a company. In any case, as a contractor or independent contractor, you are not an employee. You are self-employed.

You should set up your own business identity. Here is why:


Why do I have to set up a business entity if I am an independent contractor? Because you are now self-employed, with all the reality of self employment, and the benefits.

The Reality of Self-Employment
You will have income, probably in the form of a 1099-MISC, which you must pay taxes on. If you don't set yourself up as a business entity and start keeping a record of expenses so you can deduct them, you will have to pay tax on the entire amount of your income.
You don't have an employer to withhold federal and state income taxes from your income, so you will need to do your own withholding.
You must pay self-employment tax (Social Security and Medicare) on your income from self-employment. No one pays this for you, so you must plan to set aside this money (15.2 percent of your profits) to pay with your tax return.
You have no one to pay your insurance (health insurance, liability protection), so you will have to pay it yourself or do without.
The Benefit of Setting up a Business Entity
If you set up a business entity such as a sole proprietorship, or better, a limited liability company, you can deduct legitimate business expenses to minimize your tax bill.
You can also use the deductions to minimize your profit and your self-employment tax.
You can use your business entity to purchase insurance and take the deductions for this expense, again minimizing your tax bill.
Setting up an entity minimizes the chance that the IRS will say your business is just a hobby or deny your deductions.
You can set up simply as a sole proprietor, or you can go the next step and register as a limited liability company or other entity. In any case, taking your business to the next level by establishing a business entity separate from your personal finances is worth your time and trouble.