Starting a Business as an Independent Contractor

Updated August 5, 2025

There are many paths to entrepreneurship, and for some aspiring business owners, becoming an independent contractor is a natural first step. But what exactly is an independent contractor, and how do you get started?

What is an Independent Contractor?

An independent contractor is someone who runs their own business and offers services to individual clients or businesses on a contract basis. Independent contractors often create business opportunities for themselves using the skills and knowledge they already have, providing their expertise to others, without the limitations of employment.

For example, someone with a background in accounting may offer bookkeeping services to local businesses, while a graphic designer could offer logo design or website development services. Platforms like Fiverr, Upwork, Freelancer, and Marketerhire have made it easier for independent contractors to market their services to a broad online audience.

Advantages and Disadvantages of Being an Independent Contractor

Advantages:

• You are your own boss and make all the decisions regarding your livelihood
• You gain significant flexibility, deciding your schedule, your rate, the clients you will work with, and the projects you will pursue. You can manage the size and scope of your business to fit your lifestyle, and you are not tied to one employer.
• You have direct control over costs. You can keep your overhead costs low, which makes this an ideal path for those starting a business on a budget.

Disadvantages:

• You will not receive employee benefits from a client, such as medical benefits, retirement plan contributions, company equity incentives like stock options, holiday/sick/vacation pay, and others. You will also not be covered by the client’s medical insurance or have unemployment insurance. 
• You will be responsible for marketing your business and acquiring and managing your clients.
• You will be responsible for estimating and paying your own taxes, obtaining the appropriate licenses and permits, and purchasing adequate business insurance as appropriate.

Independent Contractor or Employee?

Individuals may prefer to be engaged as independent contract workers for greater flexibility, autonomy, and perhaps higher pay. Similarly, companies may prefer to hire workers as independent contractors for their own flexibility and cost savings. However, some companies may have policies that workers must be hired as employees, in accordance with labor and employment laws designed to protect workers. It is important to understand that labor and employment laws are primarily enacted at the state level, so every state may have different standards. The laws of the state where the worker is performing the work apply. Therefore, if an individual is working for a company in New York but working from their home in California, then California labor and employment laws will govern their status as an independent contractor or employee.

Understanding the difference between an independent contractor and an employee is critical to ensure compliance with the applicable state labor laws.

Different states have different tests to determine if a worker should be considered an independent contractor or employee. California was first to implement the "ABC Test" but now over a majority of U.S. states have adopted the ABC test.

The ABC Test requires that a worker be classified as an independent contractor only if:

1. The worker is free from the control and direction of the hiring entity in performing their work.
2. The worker performs tasks outside the usual course of the hiring entity’s business.
3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed. (Source: California Labor & Workforce Development Agency.)

California law provides exceptions to the ABC Test, particularly for occupations where workers are already independently established (such as real estate agents or certain freelance writers). Some exceptions expressly require the worker to have registered and licensed their business in order for the exception to apply. For other exceptions, an established business is not required but is one of many factors weighing toward allowing the worker to be considered an independent contractor. 

Establishing Your Business: 4 Key Steps to Set Up Your Independent Contractor Business

For those starting a business, ensuring that you establish your business formally and operate as an independent entity—either as a sole proprietor, partnership, LLC, or corporation—can help to establish your independent contractor status, minimize misclassification risks, and protect your business in the long run. This can also be important for pursuing contract opportunities because it minimizes the risk to the hiring company.

While the process may vary depending on your state, here are some key steps to setting up your independent contractor business:

1. Decide on Your Business Structure (Entity) – Independent contractors are often sole proprietors, meaning one person conducting business. However, some people may decide to form a partnership with one or more other persons, or they may elect to establish as a limited liability company (LLC) or corporation, both of which require filing the business entity with the secretary of state. Visit MOBI’s Business Organization session to learn more about the different types of business entities.
2. Obtain a Tax ID Number – You will need to register for an employer identification number (EIN) or use your social security number (SSN) or individual taxpayer identification number (ITIN) to operate your business in the U.S. Using an EIN, even if you have a SSN or ITIN, can help protect your privacy and personal tax identification number. Whether you have an SSN or ITIN, you can apply for an EIN, free of charge on the IRS website. An EIN is required for some businesses, for example those that have employees. Be sure to understand the laws and requirements in your area.
3. Register Your Fictitious Business Name (DBA) – A fictitious business name (or DBA “doing business as” name) is the official name of your business that you will use on all invoices, communication, and marketing. You typically file with the County Recorder’s Office (this may also require publishing your business name in a local paper within 30 days). The fictitious business name filing is appropriate when the business is not operated under your own name(s) (if it is a sole proprietorship or partnership), or is operated under a name different from the official LLC or corporation filing.
4. Obtain Business Licenses and Permits – All businesses will need an annual business tax license, also known as a “business license.” Depending on your location and type of business, you may also need other licenses, permits, or certifications to operate your business. For example, if you are selling food items you prepare at home or an off site kitchen you may need a food handler’s permit, a commercial kitchen license, and/or other permits. These are in addition to any licenses required for particular vocations such as electrician, contractor, hair stylist or other beauty industry professional, accountant, child/day care, etc. Visit MOBI’s Licenses and Permits session to learn more.

Other Recommended Activities when Starting an Independent Contractor Business

• Establish a separate bank account for your business and keep track of your income and expenses for tax purposes.
• Obtain a Sales Tax Permit (also known as a Seller’s Permit or Sales Tax License) if applicable.
• Purchase business insurance.
• Create a website for your business.
• Advertise your business.

Why Should You Establish Your Business?

As an independent contractor you may decide to pursue small jobs here and there, work primarily with a few larger organizations, or something in between. Since you may need to verify your status and eligibility as an independent contractor to pursue contracts, the activities above will contribute to establishing your business as an independent entity.

Paying Estimated Taxes Quarterly

It can be difficult for small businesses to plan ahead and budget for large tax payments at the end of the year. Paying a quarterly estimate will allow you to manage your cash more evenly with regard to tax payments. Because independent contractors are responsible for paying their own income taxes (the income taxes are not deducted from their paycheck), it is important to plan ahead and budget for tax payments, which could be quarterly or yearly.

How to Establish Pricing, Create Contracts, Track Time, and Invoice Clients

Before you pursue business opportunities, consider your pricing model, how you will bill for your services, and how you will accept payments. Do some research to understand your options and the market value for your services.

As an independent contractor, you will likely sign a contract provided by the organization for which you are providing services. However, it might be a good idea to do some research online or consult with a business attorney to create your own contract template in the event you work for an organization or individual who does not have a standard contract. Note that most template contracts found or generated online tend to be more favorable to the business, and not the contractor, so it is recommended that you consult with an attorney.

It can be helpful to use a notebook or an online spreadsheet program to track your hours or jobs as you go rather than trying to remember all your activities at the end of the month.

Popular Types of Independent Contractor Businesses

There are several industries that provide opportunities for independent contractors, including but not limited to:

1. Digital Marketing Services – Most businesses have an online presence for attracting customers and creating demand for services like SEO (search engine optimization), social media management, and content creation.
2. Freelance Writing and Editing – Content creation, especially for blogs, websites, and social media platforms, continues to grow.
3. Graphic Design – Designers offering services in logo creation, branding, and web design are highly sought after by businesses of all sizes.
4. Virtual Assistance – Many entrepreneurs and small businesses rely on independent contractors to handle administrative tasks like scheduling, email management, and customer service.
5. Web Development – With more businesses moving online, web developers who can build and maintain websites are in high demand.
6. Online Teaching and Tutoring – Independent educators can offer online courses or personalized tutoring.
7. Consulting – Professionals in fields like business, finance, human resources, and technology are increasingly working as consultants, offering their expertise to small businesses and startups.
8. Photography and Videography – Independent photographers and videographers are hired for everything from product photoshoots to event coverage.
9. Fitness and Sports Coaching – As health and wellness remain a priority, personal trainers and yoga instructors are moving online, providing virtual coaching services.
10. App Development – The need for mobile apps provides opportunities for developers.
11. AI Expertise – Artificial intelligence is changing the way people work in many industries, providing numerous opportunities in consulting, training, integration, marketing, data analysis, and many more.

Starting an independent contractor business doesn’t always require significant investment. Many of these businesses leverage skills you already have, and with basic marketing, you can start building your clientele. Some require minimal equipment or software, which keeps overhead costs low.

In Summary

Becoming an independent contractor offers a flexible path to entrepreneurship. By establishing your business correctly, managing your taxes, and ensuring legal compliance, you can minimize risks and maximize your opportunities for growth. Whether you're leveraging existing skills or exploring new niches, there’s never been a better time to start your independent contractor business. MOBI's free online courses can guide you through the process, making entrepreneurship accessible and actionable for all.

About the Author:

Laura Norris, J.D. ’97, is Santa Clara University School of Law Associate Dean for Academic Affairs, Clinical Professor of Law, Director of Innovation, Assistant Director, Entrepreneurs' Law Clinic, and Tech Edge J.D. as well as a MOBI Advisory Board Member.

About The Entrepreneurs’ Law Clinic at Santa Clara Law:

The Entrepreneurs’ Law Clinic at Santa Clara Law services the active local startup community by delivering quality legal services to entrepreneurs through the use of upper-division law students. Entrepreneurs have two opportunities to receive services: 1) The Entrepreneurs’ Law Clinic (ELC) is a transactional clinic assisting with transactions crucial to startup companies, such as business entity formation, financing, operational contracts, company policy, website terms of service, and intellectual property licensing; and 2) The Bronco Entrepreneurs’ Applied Collaboration Hub (BEACH), a resource for entrepreneurs to receive free business and legal information and resources, employing lawyer and student volunteers.