You’ve likely been managing your own personal finances for years, so it might be tempting to just apply the same principles you use for your personal finances to your business. But there are important differences to consider.
One of the most significant consequences of the digital revolution is the so-called “gig economy.” The term “gig,” as originally coined by musicians, describes a short duration job — similar to the ones players get sitting in on recording sessions or touring with headlining artists.
The term is now applicable to any short-term employment situation, whether for software coding, video production, or another project-based job typically accepted by freelancers, as well as temporary and part-time hires classified as independent contractors.
Given the potential for generating substantial income working this way, it’s natural to wonder: Do independent contractors need a business license?
The answer depends upon a number of factors.
What Is an Independent Contractor?
According to the California Department of Industrial Relations (DIR), “It is necessary to closely examine the facts of each service relationship and apply the law to those facts.”
In other words, independent contractors are typically defined on a case-by-case basis.
The DIR goes on to say, “The most significant factor to be considered is whether the person to whom service is rendered (the employer or principal) has control of — or the right to control — the worker both as to the work done and the manner and means in which it is performed.”
Here are the key considerations upon which the independent contractor classification is based:
- Whether the person performing services is engaged in an occupation or business distinct from that of the principal;
- Whether or not the work is a part of the regular business of the principal or alleged employer;
- Whether the principal or the worker supplies the tools and the place for the person doing the work;
- The alleged employee’s investment in the equipment or materials required by their task or their employment of helpers;
- Whether the service rendered requires a special skill;
- The kind of occupation, and whether the work is usually done under the direction of the principal or by a specialist without supervision;
- The alleged employee’s opportunity for profit or loss depending on his or her managerial skill;
- The length of time for which the services are to be performed;
- The degree of permanence of the working relationship;
- The method of payment, whether by time or by the job;
- Whether or not the parties believe they are creating an employer-employee relationship may have some bearing on the question, but is not determinative.
The DIR also states, “Even where there is an absence of control over work details, an employer-employee relationship will be found when:”
- The principal retains pervasive control over the operation as a whole.
- The worker’s duties are an integral part of the operation.
- The nature of the work makes detailed control unnecessary.
By the way, simply having a contract stating you’re an independent contractor does not guarantee the state will consider you to be one. What’s more, being paid based on a 1099 also will not automatically classify you as an independent contractor.
While these specific regulations are issued by the state of California, many other states have similar rules governing the employer-employee relationship. It’s a good idea to look up the rules in your own state to determine the guidelines that apply to your particular situation.
Who Needs a Business License?
As you can see, it is possible to be classified as an employee, rather than an independent contractor, even within the gig economy. The onus falls upon the employer to be licensed when the rules classify you as an employee.
However, the rules also vary from state to state if you’re definitely an independent.
According to the legal experts at Nolo, a few states — most notably Alaska and Washington — require all businesses to get a state business license. In other states, the need is predicated upon the nature of your profession. For example, doctors, lawyers, nurses, builders, and architects are required to be licensed everywhere. This is understandable, given the nature of these types of work and the dangers of allowing unqualified people to perform the duties of these positions.
However, the regulations are generally a bit more lax if you’re a consultant or freelancer in a lower-risk field like computer programming or photography. On the other hand, some municipalities require business licenses for independent contractors regardless of the state’s position on the matter. After all, they’re missing out on potential tax revenue by turning a blind eye to people working this way.
Other Factors to Consider When Pursuing a Business License
You should make sure the nature of your work complies with local zoning ordinances before applying for a business license. You’ll also need to confirm you’ll be in accordance with the codes, covenants, and restrictions (CC&Rs) governing your community if your neighborhood has a homeowner’s association (HOA).
You’ll typically be fine if your work is quiet and unobtrusive. In other words, a graphic designer, writer, or a software engineer is likely to encounter little resistance. However, you can expect your neighbors and zoning ordinances to look upon your work more harshly if it’s noisy, dangerous, or obtrusive.
It’s smart to investigate the situation on your own first because the city will look into it when you file the application. What’s more, you will be ordered to shut down your business if the government determines zoning laws prohibit your activities. The good news is you can apply for a variance — however, you’ll be looking at rather significant delays while that process is conducted.
The best way to make sure you’re operating in compliance with the law is to check with your city or county clerk, planning or zoning department, or tax office. The Building and Safety Department or the Department of Public Works can have a say in the matter as well. Getting in touch with your local Chamber of Commerce can help you determine which of these departments to contact.
How Do You Get a Business License?
Once you’ve determined you need a business license, ask the individual at the confirming agency what procedures you need to follow to acquire the document. The process is fairly simple in the vast majority of cases. You’ll go to the website of the appropriate organization and fill out the required forms based upon the accompanying instructions. This can almost always be done without the assistance of an attorney, though there may be a filing fee.
You’ll need to choose a business name, for which you might also have to register a “Doing Business As” (DBA), unless you’re working under your own name or it is part of the name of your business. You’ll also need to get a tax registration certificate, as well as pay self-employment and estimated income taxes. Earnings of more than $400 annually must be reported to the IRS.
The Consequences of Operating Without a Business License
Penalties vary, depending upon whether or not you have employees and the nature of the regulations governing your occupation or profession.
A freelance writer working at home would face much lighter punitive measures than an unlicensed dentist operating a home office. At worst, the writer would be looking at local fines, fees, and possible back taxes. The dentist could face charges, fines, and fees from local authorities — as well as state and federal authorities.
In both cases, though, you could be ordered to cease operations, which could also open you up to breach of contract lawsuits from customers whose work you’d be banned from completing. If you get into trouble for operating without a business license, it’s a good idea to consult an employment attorney, particularly if you have some rather significant fines levied against you.
Now, With All of That Said…
It is believed that the majority of independent contractors never obtain business licenses. But we are most assuredly not advising you to forgo getting one — it’s up to you to do your homework and determine if you need a business license for your chosen field.
As we mentioned above, most people won’t even notice what you’re doing if the nature of your work is benign. In other words, you’ll likely work in peace — without the need for a business license — as long as you’re preserving the sanctity of your immediate environment.
However, all you need is one irritated neighbor to complain and your business operations could be disrupted. The consequences will likely be the same, even if you are always quiet and considerate of the peace of your neighborhood: you’ll be ordered to cease operation, as well as pay applicable fines and any back taxes that might be due. You can then get a license and begin operating again, assuming your business complies with the applicable zoning laws as well as any potential HOA CC&Rs.
So, do independent contractors need a business license?
Depending upon the nature of your work, the decision to get the license ultimately falls on you. Research local and state laws to determine if you’ll need one based on your exact circumstances. However, do be aware that the consequences of being found in operation without a business license for independent contractors can be rather costly.
By the way, although it won’t cover you for being caught operating without a license, protecting your livelihood with General Liability insurance is a must for independent contractors.
NOTE: While this article touches upon legal situations and regulatory information, it should in no way whatsoever be looked upon as legal advice. Always seek the advice of a qualified attorney-at-law if you have specific legal questions surrounding this topic or any other legal matter.
Our editorial content is intended for informational purposes only and is not written by a licensed insurance agent. Terms and conditions for rate and coverage may vary by class of business and state.