What Independent Contractors Need to Know about Business Licenses

By Lindsey Raker.

Independent contractor, gig worker, freelancer; no matter how you make money, you’ll need to pay taxes on it. It’s important to get registered and file the necessary paperwork before you start your first job with a client or you issue your first invoice. Failure to do so can result in fines and fees, and not least of all — headaches when tax time comes around. But what licenses do you need? Does an independent contractor need a business license?

Like everything with regards to business license compliance, it’s highly dependent on location. Many states do not require independent contractors to get a business license, but your city, municipality, or county may. Either way, you have some research to do to make sure you conduct business legally. This article is a good place to start; we’ll answer common questions independent contractors and businesses who hire independent contractors might have.

What’s an independent contractor?

According to the IRS, freelancers and consultants are classified as independent contractors. These individuals are contractually obligated to perform a service, but do not have the legal status of an employee. This includes freelance writers, graphic designers, and anyone who gets a 1099 form from a company.

Are you a construction worker? Check out this blog.

What’s the difference between an independent contractor and a full-time employee?

While working, individuals with employee status answer to their employer. Their employer calls the shots when it comes to what type of work they do, where they do it, and how they get the job done. They should also get federal and state protections like minimum wage, and benefits like family leave, health insurance, and paid sick time.

An independent contractor is self-employed, and negotiates their relationship with the employer or clients. They set their own work schedule and may be responsible for providing their own equipment and supplies.

One difference between an employee and an independent contractor is the tax forms they fill out and submit to the IRS and to the state every year. An employee will get a W-2 in the mail, and an independent contractor will get a 1099 for every client they’ve worked with. Employers do not pay payroll taxes on independent contractors or withhold money for taxes, so an independent contractor should set aside money from each job to pass on to the IRS.

Speaking of the IRS, they’re the definitive source for all independent contractor information. While we try to stay as current as possible with changing rules and regulations, the IRS website or your tax counsel are good resources as it relates to your particular situation.

What does a business license do?

A business license legally allows your business to operate within a particular jurisdiction. Depending on the work you do, you may need a number of licenses and permits to legally open up shop.

Who needs a business license?

The simple answer is that every business needs a business license to operate.

“But blog writer,” you say, “I’m just a person! Do I need a license?”

The answer is, it depends. Some states require you to register for a business license as an independent contractor and some don’t. It can also depend on the type of work you do.

Some fields, like nursing, law, and hairstyling require you to be licensed wherever you work. If your job is one you can do in sweatpants from your couch, like freelance writing, graphic design, or administrative work, you may not need a specialized license.

Some states like Alaska and Washington require all independent contractors to obtain business licenses.

Others vary by county or city, like in California. Independent contractors don’t need a license to operate in the state of California, but they may have other requirements based on where they build their business.

Still others will vary based on the kind of work you do. In Florida if your business sells merchandise or services, you must obtain a local business license depending on your city or county.

Getting a business license isn’t necessarily a one-and-done deal. You often need to renew them. Seattle requires independent contractors to renew their business licenses annually, for example.

How do I get a business license?

In many cases, you can apply for a business license online. However, some jurisdictions may require you to mail in your application. Your attorney or CPA should be able to help you find which licenses you need, but they can be expensive. If you’re figuring it out on your own, your state’s Department of Revenue, City Clerk’s office, and county government websites are good places to start.

Meanwhile, Avalara offers two ways to determine your business license requirements — Avalara License Guidance and Avalara License Filing.

New to this topic? Here are some terms you’ll want to know:

Independent contractor: according to the IRS, someone is an independent contractor “if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done”

Freelancer: similar to an independent contractor in regards to the tax implications, but generally takes on shorter projects than an independent contractor

W-9 form: the IRS form a freelancer or independent contractor fills out to provide their Taxpayer Identification Number (TIN) to the employer

1099 form: the IRS form used to report income earned from self-employment, among other sources

W-2 form: the IRS form used to report wages paid to employees and the taxes withheld from them

Business license: permits issued by government agencies that allow companies to conduct business within their state, county, or city

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