Becoming A Contractor—What You Need To Know To Get Started

(Updated May 2023)

Most tech professionals are probably familiar with the full-time versus contract work debate. If you’re a software engineer or developer in a full-time role, have you ever considered becoming a contractor? Are you on the job market but unsure about your next move? Whether you are interested in working on a project as a contractor for the first time or looking for a full-time position, it’s good to know your options.

Looking into becoming a contractor may seem intimidating, so we created this resource to help get you started on the details. Knowing the legality of becoming a contractor in the State of Colorado or elsewhere is key to avoiding legal fines and properly paying your taxes, but it doesn’t have to be a headache. Please note that this resource is informational, and not intended to be legal advice.

Explore Your Options

This year, decreased predictability has caused a shift when it comes to hiring. From our perspective, companies are still willing and able to grow, hire, and expand their operations four and half months into the pandemic. This is encouraging, and affirms resilience in our local and national economies. However, finding new engineers may more closely resemble dipping toes into a stream instead of diving into an Olympic sized pool.

The hesitation isn’t unexpected. Eager to grow, companies must simultaneously work to expand and also prepare for the future. One way to do so is through contractors. Becoming a contractor could benefit an individual in the long-run in terms of diverse opportunities and flexibility. But how can switching to being self-employed benefit you personally?

Benefits Of Becoming A Contractor

If you’ve ever dreamed of working for yourself, contractors certainly have that agency. Many contractors can negotiate work hours or work remotely. Contractors also have the option to work for multiple companies or on more than one project at a time. This lends to opportunities for growth and diversifying technical skill-sets. Often times, contractors are paid at a higher rate to compensate for lack of traditional benefits.

Contract work also opens many doors for using your skills creatively, and for projects and companies that excite your passions. Reaping the benefits of becoming a contractor means seeing direct results of your hard work, and this can be attractive to many people. Our advice? Do plenty of research and ask others with experience about getting into contract work.

What Does It Mean To Be Self-Employed?

If you are an independent contractor, you are self-employed. Being self-employed means you can deduct health insurance costs. You can reduce your net self-employment income by the amount of your self-employed health insurance deduction on Form 1040. Generally, you are self-employed if any of the following apply to you:

• You carry on a trade or business as a sole proprietor an independent contractor, depending on situation.
• You are a member of a partnership that carries on a trade or business.
• You are otherwise in business for yourself (including a part-time business).

Choosing A Business Structure

Ok, so you’re on board with becoming self-employed, but what comes next? When beginning a business, you must decide what form of business entity to establish. Your form of business determines which income tax return form you have to file.

The most common forms of business are the sole proprietorship, partnership, corporation (S and C Corporation) and Limited Liability company (LLC). A Limited Liability Company (LLC) is a relatively new business structure allowed by state statute. LLCs are popular because, similar to a corporation, owners have limited personal liability for the debts and actions of the LLC. Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation.

Visit the Business Structures page to learn more about each type of entity and what forms to file. If you are interested in more information on classifications and types of business entities specifically related to engineering and technology positions, reach out to our team.

Getting Started Resources

With a little dedicated time and effort, it can be exciting to take the next step in working for yourself. This list of references can answer many FAQ’s, but there is more to becoming a contractor. Make sure you take a look at the Tips for Choosing a Tax Return Preparer.

Also consider the Virtual Small Business Tax Workshop. Composed of nine interactive lessons, the virtual workshop is designed to help new small business owners learn their tax rights and responsibilities. The IRS Video Portal contains video presentations on topics of interest to small businesses, individuals and tax professionals. We think videos are a great way to learn and also multi-task eating an over-sized bowl of popcorn while you take notes.

Additional References/Related Topics

• Small Business and Self-Employed Tax Center 
• Forms and Instructions - Filing and Paying Business Taxes
• Business Taxes for the Self-Employed: The Basics 
• Publications and Forms for the Self-Employed 
• Publication 505, Tax Withholding and Estimated Tax
• Recordkeeping

What are My Self-Employed Tax Obligations?

Generally you are required to file an annual return and pay estimated tax quarterly if you become self-employed. Usually, self-employed individuals must pay self-employment tax (SE tax) as well as income tax. SE tax is a Social Security and Medicare tax primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. This is a key distinction, read more on it here.

• An important note to remember: Anytime the wording "self-employment tax" is used, it only refers to Social Security and Medicare taxes and not any other tax (like income tax).

Overall, if your net earnings from self-employment were $400 or more, you have to file an income tax return. If your net earnings from self-employment were less than $400, you still have to file an income tax return if you meet any other filing requirement listed in the Form 1040 instructions.

So You Want To Be A Contractor

Still with us? While complex on the surface, once you have set yourself up for working as a contractor in the technology sector, the possibilities are plentiful. Ensuring all your ducks are in a row is where the diligence comes into this process. Demystifying self-employment is a worthy endeavor for many.

Check in with legal counsel when finalizing your self-employment process or tax questions, but we’re also here to help! If your gears are turning, there is more to learn, so inquire about our other resources on becoming a contractor.

Here at BWBacon Group, we know and live what you are experiencing as an employer or job seeker in Denver, Boulder, Dallas, San Francisco, New York City or any of the other cities we work in. We believe great recruiting starts and ends with understanding people.

If you have any questions about living, working or playing any of the areas we serve, please contact us. We are happy to help. Seize the day, every day, that’s what we say!