Business Licenses for Independent Contractors

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 What are Business Licensing Requirements?

The requirements for business licensing refer to the various license and certification steps that a business must follow in order to operate in a particular area. These steps and requirements may vary by state and by the type of business seeking a license. They may also vary from city to city and even within different areas of the same city.

This is due to the fact that business requirements may vary depending on issues such as:

  • Geography;
  • Zoning; and
  • Environmental factors.

For example, there are likely different requirements for a business operating in a business area compared to a home-based business.

What is an Independent Contractor?

According to employment laws, an independent contractor is distinct from an employee in that they are the bosses of their own jobs. An independent contractor is hired to complete a certain job or task but how they complete the task is up to them, based on their professional knowledge and experience.

An independent contractor is an individual who works for a business on either a contract or a case-by-case basis. Although an independent contractor is performing work for a business and is temporarily employed by that business, they are not considered to be an employee of that business.

Independent contractors work for themselves and, therefore, they earn their living from their own work as opposed to relying on employers to provide them with a salary. Examples of individuals who are considered to be independent contractors may include, but are not limited to:

  • Professionals offering their services or advice to the public, such as real estate agents;
  • Trades in which the individual has a greater degree of autonomy, such as a freelance writer; and
  • In some situations, a mechanic.

An independent contractor is different from an employee because they have control over what work they decide to take on and how they complete their work. This is in contrast to an employee-employer relationship in which an employer controls when, where, and how the employee’s work is to be completed.

There are several other differences between independent contractors and employees. An independent contractor does not have taxes withheld from their income by an employer. Additionally, the majority of labor and employment laws do not apply to an independent contractor.

One of the main ways to determine if an individual is an independent contractor is to examine how they are being paid for their work. If an individual is on the payroll and is regularly receiving a paycheck, they are most likely classified as an employee.

Another difference between independent contractors and employees is that many federal and state laws apply to employees, including the Internal Revenue Code (IRC) and the Fair Labor Standards Act (FLSA). Employers are required to follows these laws and:

  • Pay Social Security and Medicare;
  • Withhold income taxes;
  • Pay for unemployment insurance;
  • Pay at least the minimum wage; and
  • Pay overtime wages.

Independent contractors are not subject to the previously discussed requirements. Therefore, an independent contractor often earns a higher wage because their employer does not withhold tax or pay for employee benefits.

An independent contractor is in control of paying their own taxes and is responsible for their own actions. Liability for misconduct is limited to an independent contractor and does not usually extend to their employer. In contrast, employers may be held liable for the actions of employees due to a legal doctrine called vicarious liability.

Who Qualifies as Independent Contractors?

Employment laws provide guidance for determining if an individual is an independent contractor or an employee. Generally, if the worker has the power to control the manner in which they do their job, they are most likely an independent contractor.

If the worker has little to no control regarding how or when they complete their work, they are likely an employee. The difference between an employee and an independent contractor can be unclear at times.

It is very important for employers to take precautions when hiring independent contractors and be aware of their rights and obligations. Employers have obligations to independent contractors which are different than those for employees.

Why are the Advantages of Hiring Independent Contractors?

There are several advantages to hiring independent contractors as opposed to employees. For example, employers can save money because they are not required to pay benefits or employment contributions.

In addition, independent contractors cannot sue for various employment-related claims, including family and medical leave or discrimination. Independent contractors can also be particularly useful if there is a specific project that needs completing but does not require hiring a new full-time employee.

Does an Independent Contractor Need a Business License?

An independent contractor is often a trained professional. Due to this, they may be required to be licensed by the vocational licensing board in their state. For example, a health professional or a lawyer will have to complete licensing requirements for the state in which they practice.

In addition, as non-employees, a contractor may be required to hold a local business license in order to hire employees or do business. The requirements differ by city and county. Some areas do not have a business license requirement. In other areas, independent contractors who work from home must obtain a business license.

What is a Business License?

Essentially, a business license is a city tax receipt. An independent contractor may pay a relatively inexpensive fee, anywhere between $30 to $50, and have the right to operate their business within the city limits. There may be penalties of several hundred dollars for independent contractors operating without a business license.

How Do I Get a Business License?

An independent contractor will have to do some research regarding the city or county in which they will be working in order to obtain a business license. If they are not sure where or how to begin, a local attorney can provide guidance throughout the process.

A good place to begin may be the city’s website or going to city hall. Depending on the city, the office in charge of business licensing may be:

  • The building and safety commission;
  • The chamber of commerce;
  • The city clerk;
  • The zoning and planning department;
  • The department of public works; or
  • The tax office.

For example, in San Francisco, an independent contractor would obtain their business license from the Office of the Treasurer and Tax Collector. Most individuals would pay a $150 fee for business license registration and payroll tax would be collected at 1.5%. Failure to complete the registration is a misdemeanor, which is punishable by imprisonment and/or criminal fines.

Do I Need a Lawyer to Get a Business License?

It can be very helpful to have a contract lawyer assist you with obtaining your business license as an independent contractor. As noted above, business laws may vary, even within the same city, so having a lawyer’s assistance may help you avoid issues or fees in the future.

If you are being assessed for a fee or facing criminal charges for operating a business without a license, it is important to contact an attorney as soon as possible. Your attorney will review your situation, advise you of your rights, and represent you if you are required to appear in court.


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