The information presented here is designed to assist with setting up your new business and informing you of business and tax responsibilities. Regulations are constantly being updated so be sure and check with your tax/business professional for any changes that you need to be aware of.
Working as an independent contractor is the same as having your own business and being self-employed. Congratulations! You have embarked on a new adventure which will provide you with more freedom and independence combined with the ability to earn more income and save on taxes. Below is a list of things to do, some required, some optional, in order to get the most advantage from being an Independent Contractor/Self-employed business person.
1. Business entity: I assume you will choose to operate as a sole proprietor initially. This is the simplest form and what you will be most familiar with. Other options for you are to form a corporation or limited liability company.
2. Name: you can use your own name or pick a new business name. If you pick a new business, you must check with the DCCA to make sure that the name is available. If it is, then you need to register it for a nominal fee.
3. General Excise Tax License: as an independent contractor, you will be responsible for paying GET on your GROSS INCOME. Go to www.state.hi.us/tax and fill out the Basic Business Application form. (BB-1) You will need to send that to the state with a check for $20.00 to obtain your GET number. You will in turn receive a business license in the mail and a booklet with forms to assist with filing your general excise tax. When filling out the form, I suggest marking box 30, Filing Period as Quarterly.
4. Federal ID#: Although this is not required for a sole proprietor, I suggest obtaining a federal ID#. When filling out forms or opening a bank account, you can use this number instead of your personal social security number. Go to www.irs.gov and print off form SS-4. Fill it out completely. You can either file on line whereby you will receive an EIN or you can call the #800 on the form and obtain the number. Both options result in obtaining an EIN immediately.
5. Federal taxes: As an independent contractor, you will receive gross pay with no taxes withheld. It is your responsibility to pay your own self-employment tax (social security and medicare). Depending on the amount, you can pay with your federal tax return (Form 1040). It is highly recommended to have a tax consultation to determine if it is best to submit your taxes quarterly by making estimated tax payments. The taxes you pay will be based on your NET INCOME and not the GROSS COMMISSION that you get paid. As a self-employed you have the right to deduct certain business expenses from your gross income which will lower the amount of tax that you pay. See #6 below for a list of common business deductions.
6. Businesss Deductions:
- Auto expenses
- Business phone
- Legal fees
- Office supplies
- Professional dues
7.State income taxes: similar to federal income taxes, depending on the amount, you can pay with your annual state tax return or make periodic estimated payments.
8. Health Insurance: the premiums you pay for health insurance are deductible on your federal income tax return. Listed below are the names and numbers of some local providers of health insurance
- HMSA 948-6111
- HMAA 591-0088
- UHA 532-4000
9. Employees: When your business grows, and you find the need to hire employees of your own, there are several other types of insurance that you need to obtain, quarterly payroll reports to file, etc. Please seek professional assistance at this point to learn more.
10. Record-keeping: keep all receipts that pertain to your business activity. Keep a mileage log in your car, possibly open a separate bank account, set up a simple filing system. For example, get 12 manila folders, one for each month of the year. Place all receipts for income, deposits and expenses in the appropriate folder for safe-keeping and for help in preparing quarterly and end of year tax returns.
11. Unemployment: Remember that as an independent contractor, you are not eligible to collect unemployment unless you or your company pays into the fund. Call 808-586-8844 to file for an unemployment insurance number and obtain form UC-B6.