How Independent Are You?

You think you're freelancing. Your client thinks you're freelancing. But does the IRS?
Magazine Contributor
2 min read

This story appears in the February 2002 issue of Entrepreneur. Subscribe »

Q: I am planning on doing consulting work for some associates who've started a retail business. I will be handling their advertising and promotions as an agency. They're willing to set me up as an independent contractor and give me a 1099 at the end of the year. Should I go with that option, or should I file for a business license and invoice them? If I go the 1099 route, how do I go about charging fees? I'd like to bill customers on a per-project basis.

Name withheld

A: Because you're a sole proprietor, you'll report the income reflected on the Form 1099s you receive on Schedule C of your 1040 tax return. But that's not all-you'll also need to make estimated tax payments if you'll owe $1,000 or more for the year. Estimated taxes need to cover both income tax and the federal self-employment tax-Social Security and Medicare.

It's a good time to start your own business, so you should obtain a business license and seek out more than one client. Billing by the project is a good idea, because it clearly differentiates you from an hourly employee. And by all means, invoice your clients rather than submitting a time sheet like an employee.

Don't participate in benefits offered to employees by the retail business, such as a health insurance plan. As companies increasingly rely on consultants, freelancers and independent contractors, the IRS and state tax agencies want to be sure such arrangements are not just a way for both parties to avoid paying conventional employee taxes. Should the IRS decide that you're an employee masquerading as an independent contractor, both you and the client will suffer.

As a business owner, you're able to take many valuable deductions. For details, and to download forms and publications, log on to

Paul and Sarah Edwards' most recent book is Changing Directions Without Losing Your Way. Send them your start-up questions at

More from Entrepreneur

Elizabeth's expertise can help you scale your business, build a personal brand and focus on being a value-driven CEO.
Book Your Session

For a limited time only, get this bundle of Entrepreneur PressĀ® titles for less than $30 (60% OFF) on our bookstore when you use "LEAP" at checkout.
Buy Now

Are paying too much for business insurance? Do you have critical gaps in your coverage? Trust Entrepreneur to help you find out.
Get Your Quote Now

Latest on Entrepreneur

My Queue

There are no Videos in your queue.

Click on the Add to next to any video to save to your queue.

There are no Articles in your queue.

Click on the Add to next to any article to save to your queue.

There are no Podcasts in your queue.

Click on the Add to next to any podcast episode to save to your queue.

You're not following any authors.

Click the Follow button on any author page to keep up with the latest content from your favorite authors.