For some, starting a business sounds like a great idea, but then we see everything involved and we think…ehhhhh, maybe not.
But if you really love to make the things that you would have been selling, what can you do? It’s not like we all have a money tree in our backyard waiting to pay for our (sometimes very expensive) hobbies.
Becoming a contractor is an option!
A contractor is hired to do the thing they specialize in. It can be cutting, sewing, being a social media manager, blog writer…the list goes on.
A contractor is still a business, but you take on a lot less responsibility and headache. Similar to a W2 job, you do the contracted work and you don’t have to think about all the marketing, customer service, compliance, etc., etc., etc. That’s a major appeal!
If you are thinking of being a contractor, make sure you know the federal and state laws. In the last few years, things have been getting a bit more intense for some contractors regarding whether they are a contractor or if they are actually an employee.
How do we know?
- Are you free to work wherever you want?
- Are you free to make your own hours?
- Are you free to work for as many people as you want, including direct competitors?
- Are you doing something that isn’t in the usual course of the hiring person’s business?*
Did you see that little asterisk? Yup, that’s a big thing in a few states right now. If a person who sews to create the products they sell hire a contractor to sew the products they then sell, they could actually become your employer which means you are not longer a contractor for them, but a W2 employee. This also means that in some states they will be required to have Workman’s Compensation. The ruling will depend on both the state they are in and the state you are in.
For example, when I was part of a non-profit (a rather tiny one), we had 1 employee. While the non-profit was based out of California, the employee was in Utah. At the time of their employment, Utah required an employee to carry certain insurances for any Utah employee, regardless of where the company was based out of. California also had their own requirements (which thankfully overlapped!)
Since these distinctions between contractor vs employee can get very muddled with some of the newer laws, you will need to take the steps to find the exact answer for your situation. Always search for the information on a .GOV website or one directly affiliated with the state or state department (you’ll know if they are affiliated because they’ll either say so or the government site will have a link to that place specifically).
Alright, now that the prefacing is out of the way, we are talking about being a contractor.
As a contractor, the first thing you want to have in your tool kit is a contract. It doesn’t have to be super long, but it does need to:
- Spell out your requirements to do the job
- Clarify the specifications that the job entails
- Payment terms and late fee clauses (yes, you can absolutely charge a % late fee!)
- Who owns the produced item (typically in terms of design, photography, etc. who retains ownership to that intellectual property)
- What is permitted for you or them to break the contract (don’t forget to make sure there is not just a natural forces clause, but also a pandemic clause!)
- What happens if there is a breach of contract (outside of the permitted breaks)
- Limits of liability
This contract is your fail-safe. It provides everyone the same information on what is expected and, if there is ever an issue, what the correct action is.
The second thing to have in your tool kit is a W9 ready to provide them. This document will give them your Social Security Number OR your federal EIN. Make sure the information is always up to date so that if they are required to send you a 1099, they are able to do so. (You should receive one if you are paid $600+ in a calendar year.) You will be required to file this income regardless of receiving this 1099.
The third thing to have in your tool kit is some way to track your income and expenses. Remember, you are still a business! You’ll want to be able to track specifically:
- Who paid you
- When you were paid
- How much you were paid (include store credits, gift cards, and merchandise at fair market value)
- Supplies you had to purchase
- Traded goods or services at fair market value (sometimes we like to barter our services and that is ok!)
- Payment processing fees (Paypal, Stripe, Square, etc.)
- Other allowable deductions from the Schedule C Part II
BONUS! Ok, this one might be a no-brainer, but it is important not to forget! It is a really good idea to have some sort of storage system. Whether that is data storage (keep your clients information confidential!) or storage for supplies and materials from your clients, you’ll want to keep it all straight! The more people you are contracted with, the more things are going to get jumbled. Getting yourself straight from the get-go will make your life so much easier so you aren’t sending the things to the wrong client.
BONUS! Final bonus, I nearly forgot! If you want to be able to have your client information, contracts, and payment processing all in one place, I cannot recommend HoneyBook enough. Through this link, you can also get 20% off your first year with them and start tracking:
- Income & expenses (integrates with Quickbooks!)
- Projects (Inquiry > Follow Up > Consult > Proposal > Contract Signed > Retainer Paid > In Progress > Design > Planning > Completed; you don’t have to use them all, I don’t!)
- Time working
- Calendar dates
- Contacts & Clients
- Leads & where they come from
- And so many more features other than just tracking!
So now you know if you are a contractor or an employee. You know that if you are a contractor, you are still a business and you still file your income and expenses. You also have a few tools to make your contracting business a success!
Check out these products to help your journey.