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Are you wondering, “Can I hire myself as an independent contractor?”. You can, but you must know the procedures for compensating yourself. The income you pay yourself in carrying on a trade will depend on the type of business structure you elect.
If you’re planning on working for yourself, and aren’t an owner or an employee of a corporation, hiring yourself shouldn’t be a problem since you’ll be an independent contractor. And, self-employed in this case.
Since you’ll be a self-employed, independent contractor, you alone will be responsible for paying your employment taxes, income taxes, social security and Medicare taxes, and insurance.
A freelancer or independent contractor is not a regular employee but a part-time worker. For instance, if you’ve taken a job as a contract worker or as a freelancer for a construction company.
In fact, with more and more people working from home or remotely, there’s a growing trend of companies toward hiring independent contractors over former employees. For one, this saves them a lot of money by not having to pay the state minimum wages.
Needless to say, companies don’t have to provide standard employee benefits to independent contractors. These benefits may include health insurance, paid vacations, maternity leave, and 401(k) contributions.
However, even if you’re self-employed or a freelancer, you need to understand your legal rights as an independent contractor.
Read more: What does contractors’ insurance cover?
As a business owner, you have several options for paying yourself, but each option comes with its tax implications.
Working for yourself
The best way of organizing your company and protecting yourself from any kind of liability is by forming a limited liability company or LLC. In such a business structure, the owners are not personally liable for the company’s debts or liabilities. To put it simply, an LLC is a hybrid business entity that combines the features of a corporation and those of a partnership or sole proprietorship.
Even if you choose any of the above case scenarios, you’ll still need to earn a living. So, if you’re wondering how to pay yourself from your LLC, here are some of the most common options to do so.
Read more: Can a general contractor do electrical work
The most common self-pay options under the LLC umbrella
If you want to receive payment from your business, here are the three most effective ways of going about it:
- Paying yourself as an employee of your business
- Paying yourself as a member of your LLC
- Hiring yourself as an independent contractor
What is the difference?
If you consider yourself an employee of your LLC, it will require you to have the tasks and responsibilities of any other regular employee. You would have to work as an hourly or salaried employee within the company.
If you opt for paying yourself as a member, then you wouldn’t necessarily be committed to a certain role or set tasks — but may have a say on when and how to receive payments.
The third option is to be considered as an outside self-represented entity, hired by the business to complete certain project-based tasks. In such a case, you’d have to pay yourself within the specific tax criteria.
Paying yourself under the LLC umbrella allows you to receive regular compensation or an income throughout the year. Whichever option you choose, you must be actively working in the business. An actual role with actual responsibilities as an LLC owner.
1. Paying yourself as an employee
This option is ideal for those who like having a predictable income and expenses for their personal budget. It’s important that you pay yourself a wage that’s realistic and specific to your construction industry, workload, and location.
While the Internal Revenue Service (IRS) considers employee wages as a business expense, it only recognizes salaries that meet the industry’s taxable criteria. As an employee, the LLC will withhold your employee and income taxes in each paycheck. You can then file with the IRS and pay taxes on the wages that you earned.
2. Paying yourself as your company’s member
Getting paid as a member will generally mean that you’ll be paid at the end of the fiscal year — along with a portion of your LLC profits. That’s to say, each member will get their share of the profits in one lump sum.
Sometimes, you do have an option to draw from the net profits every month during the year. For example, if you’re anticipating your yearly profit to be around $36,000, then you could put in a draw to receive $3,000 every month. And, if the profit ends up being around $40,000, then you could pay yourself the difference of $4,000.
In case you’re the sole member of your LLC, then you’ll have to file your profits and losses with the IRS as part of your personal tax return — paying taxes on all the distributions you pay throughout the year.
On the other hand, when you’re part of a multiple-member business, each person pays taxes on their share of the profits. In such a case, the LLC files with the IRS.
3. Paying yourself as an independent contractor
If you have a particular skill set that is beneficial for your business, you may hire yourself as an independent contractor. Furthermore, your independent contractor pay will help your business stay on budget as you don’t have to hire a third party.
Keep in mind, though, that as an independent contractor, you will have to pay self-employment taxes on your wages. You will have to file a W-9 with the LLC. The company will be responsible for IRS Form 1099-MISC during the tax season. You’ll be responsible for paying self-employment taxes on the salary you’ve earned.
Your employee wage will be considered as an operating expense for the LLC and will be deducted from the LLC’s profits. That’s why you need to be sure that any salary you draw is within the industry norms. However, you can always issue bonuses to all the LLC employees, including yourself.
Options for a self-employed independent contractor
If you’re not part of an LLC and want to hire yourself solely as an independent contractor, there are ways of going about it. Just ensure that you qualify as an independent contractor.
The next step is to register your business name, get a tax registration certificate (or a vocational license if required) for tax purposes. You can then pay the estimated taxes or advance payments of your income and self-employment taxes when it’s tax time.
Keep in mind that whenever you provide services and get paid, you must always comply with the government rules — even if you work only a few hours a week.
Read more: Can a contractor hire a subcontractor?
How you can hire yourself and get paid will depend on the business model you work with. Your employment and subsequent payments will primarily rest on the size of your business, the profit margin, and your financial situation.