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What is an Independent Contractor and why is it important?
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What should I call my consulting business?
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What “official” stuff do I have to do before working as a consultant?
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Taxes
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Annual requirements
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Important phone numbers
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Being an independent contractor means...
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You are an independent business, and like any business:
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you have a current business license;
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you make your services available to the general public;
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you provide similar services for other clients;
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you often have more than one client at a time;
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you have made a significant investment in your business;
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you are responsible for how you use your time, equipment, and materials; and
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you are responsible for any mistakes or errors made in the course of your work.
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Unlike an employee, you have the ability to realize a profit or loss. You may work under any or all of the circumstances below, which show that a profit or loss is a possibility:
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you hire, direct, and pay your own assistant(s);
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you have made a significant investment in your business;
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your services affect your business’ reputation;
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you have continually re-occurring liabilities; and/or;
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you agree to perform specific jobs for prices agreed upon in advance.
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You have been retained for your expertise. As such:
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you do not need training for the job which you have been retained to perform; and
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your client should not give you instructions or direct your work. If they furnish instructions you are not required to follow them; you are only required to meet the specifications and obligations outlined in your contract.
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You may not be fired for any reason other than non-performance of contract specifications. Likewise, you may not quit before you’ve
completed the job (or if you do quit, you will incur a liability).
You are responsible for paying your business’ taxes, and completing and filing your business’ annual tax returns.
You are not entitled to typical employee benefits such as vacation and sick pay, health and dental insurance, workers’ compensation insurance, disability insurance, or unemployment insurance. 
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Your business’ name
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When beginning your own consulting practice, you must first choose your business name. If you decide to use your own name, you may
skip this section. If you choose a different business name (even if it is just your name followed by a phrase such as “and Associates” or “Consulting”), you must file a Fictitious Name Statement with the County Clerk.
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You should first visit your County Clerk (in Santa Clara county, the office for Fictitious Business Names is in the Superior Court building in downtown San Jose) and look in the microfiche under your prospective business name. If it isn’t in use, complete a Fictitious Name Statement and file it with the County Clerk.
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This will typically cost you somewhere between $10 and $50 for one business name and one owner, plus an additional charge for each additional business name and/or owner.
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You should consider getting one or more extra official copies of your statement (there is a small charge for this). You will need these copies to open a business checking account or for other purposes.
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Many consultants form a type of business known as a sole proprietorship; you should investigate the other options available (partnership, corporation, and others), and discuss the benefits and costs with a qualified professional.
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Within 30 days of filing your Fictitious Name Statement (also known as a “Doing Business As” license), you must have it published in a qualified newspaper, or your statement will be invalid and you will have to re-file. It must run in the paper for four consecutive weeks. The County Clerk’s office will have information about placing the ad in an appropriate paper. If you use a weekly newspaper, you must begin publishing within 20 days, rather than 30.
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Call your local newspaper (you must use a “legal newspaper” that is distributed weekly or daily throughout your area) and ask for the newspaper’s Fictitious Names Clerk (usually in the advertising department). They will let you know what to do from there.
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The charge for publishing for four consecutive weeks usually runs somewhere between $20 and $50. Rates differ, so you may want to do some shopping around.
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You must advise the County Clerk’s office that publishing is complete.
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Upon completion, the newspaper will send you a certification form. You must mail this certificate to the County Clerk’s office. Some newspapers mail the certification form for you, but ask the newspaper to be sure.
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Your Fictitious Name Statement has an expiration date (it will be on the statement). It is your responsibility to renew the statement; you will not be notified when it expires.
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You must re-file (and go through the entire procedure again) if your address, or your business’ address changes.
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If you choose to use a fictitious business name, you must use a business bank account, separate from your personal account. This is where those extra copies come in handy!
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Acquiring a city business license
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You must obtain a business license from the city where your office is located. Many times, unincorporated areas don’t require business licenses. You should verify this, however, before deciding not to get one.
To get a business license, you must designate your business location. If you are primarily doing work in your home, you can use your home address. The city will usually require a permit for this from the Zoning or Planning Department. Some cities charge a one-time fee for this permit.
You can apply for your license at the City’s Finance Department (or another office located at the City Hall or Municipal Building), with the Business License Clerk. Many cities are willing to conduct the entire business license process by mail.
The cost for your business license will vary, depending on the size of your business, the type of business (for example, a corporation's license usually costs more than one for a sole proprietorship), and the city where the license is issued. Please contact your city’s licensing bureau for more information.
Important phone numbers
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Quarterly taxes
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As an independent contractor, paying taxes is your responsibility. Taxes should be calculated on your net income (income after deductions and expenses). There are three taxes due each quarter: Social Security self employment tax, federal income tax, and state income tax. They are due April 15, June 15, September 15, and January 15.
This is not intended as legal, financial, or tax advice. Tax laws and rates are subject to change. You should consult a tax attorney or accountant for current regulations and rates, and for more detailed information.
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Social Security Tax and Federal Income Tax
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Use the 1040-ES form to pay both of these taxes.
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You are eligible for Social Security tax and must pay for it through quarterly deposits. Where an employee and the employer would ordinarily each pay half of the 15.3%, you are self-employed and therefore must pay the full tax.
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Call the IRS to request copies of the estimated tax worksheet, current tax tables, and quarterly payment forms.
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State Income Tax
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Use the 540-ES form to pay your California state income tax.
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Like federal income tax, state income tax should be calculated on your net income.
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Call the Franchise Tax Board to request a copy of the estimated tax worksheet, current tax tables, and deposit coupons.
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Deductions
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Independent contractors pay taxes on their income minus their business expenses.
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An expense must be considered “reasonable and necessary” to be deductible.
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It’s easiest to prove an expense is a legal deduction if it is used exclusively for your business.
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Among the deductions that are frequently called into question are automobiles, cellular telephones, computer equipment, and the home-office deduction. You should always consult a qualified tax professional to determine your eligibility for these (and other) deductions.
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If you don’t use the equipment (computer, phone, car, etc.) exclusively for your business, you must keep logs (such as mileage records) which clearly show when the equipment was used for business and when the use was personal.
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Penalties for non-payment of taxes
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You will have to pay fines for non-payment (and they can be pretty stiff!)
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You will have to pay the tax you originally owed.
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You will have to pay interest on the unpaid amounts.
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You still have to pay the current year’s taxes on time.
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Annual requirements
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Business License Renewal
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You must renew your business license each year.
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The fee will probably depend on your gross business receipts or number of employees.
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You must complete and submit a declaration for and payment to the city where you hold your business license.
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This form is most often due in January or July. Check with your city for the correct date.
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Fictitious Name Statement Renewal
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This is typically due every few years.
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It must also be renewed whenever your address, your business’ address, or your business’ name changes.
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Declaring 1099 Income on your tax returns
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You have to report your 1099 income on form 1040, Schedule C, Profit or Loss From Business or Profession. You will also report your business expenses on this form. In certain cases, you may need to use a different form – consult a qualified tax professional for assistance.
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You must also submit Schedule SE, form 1040, which is the Computation of Social Security Self-Employment Tax.
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California also requires reporting of this information.
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