Is an independent contractor a sole proprietor?
Is there any difference between a sole proprietorship and a a self-employed?
It is often confusing for employers to distinguish between sole proprietor vs. independent contractor.
Both are popular modes of business for those who love to work on their terms. Sole proprietors and independent contractors plan their schedules and work the way they want.
However, they are responsible for paying their taxes, keeping records of their documents, etc., which is quite challenging.
So, now you know that sole proprietorship and independent contractor are not all rainbows and butterflies.
This article will walk you through the most crucial aspect- sole proprietorship vs. independent contractor and sole proprietorship vs. self-employed.
At the end of the article, you’ll come to know of both these entities, their differences, and everything else.
So, let’s start!
When it comes to sole proprietor vs. independent contractor, the first thing you must know is the definition of a sole proprietor.
Sole proprietors are people involved in running a business without registering the business as a separate entity, such as a corporation, an LLC, or a partnership business.
Thus, a sole proprietor’s business is the same as their finances. Simply stated, sole proprietors, are personally liable for their business expenses and losses. Also, they get to keep the profits for themselves.
An independent contractor is an individual who provides services to multiple businesses but not as an employee.
Typically, an independent contractor is a freelance service provider like a creative professional, graphic designer, website developer, or IT professional.
Considering how independent contractors work, you can also call them self-employed sole proprietors.
Both sole proprietors and independent contractors are self-employed. Neither of the two receives a set salary for their work. Plus, their business and personal finances are the same.
Though the mode of work for both might seem similar, there are differences between an independent contractor and a sole proprietor.
Here’s an example to help you differentiate between sole proprietor vs. independent contractor.
To give you a clear picture of the differences, we have listed a few aspects to understand the differences in 1099 vs. sole proprietorship.
For independent contractors, here’s what taxation looks like.
Taxation of sole proprietors looks more straightforward as the business and personal finances are the same. Here’s a list of the tax forms they need.
Considering Form 1099, reporting of sole proprietors' and independent contractors’ income differs.
An individual gets a 1099-MISC form if they have worked as an independent contractor. An independent contractor receives a 1099-MISC that outlines the income earned during the previous year.
On the other hand, sole proprietors must track their incomes and expenses. However, a sole proprietor might also receive a 1099 form from their client, depending on the service type.
Whether an individual is an independent contractor or a sole proprietor, it is necessary to have business insurance.
What’s common in sole proprietor vs. independent contractor is that both need the following two insurances:
General liability insurance helps to cover claims by clients and third parties against the independent contractor or the business arising from reputational damage, personal injury, physical injury, and property damage.
Similarly, independent contractors need professional liability insurance to help them cover claims of negligence and error against the contractor that resulted in the client’s financial losses.
This insurance might not be beneficial for all sole proprietors. However, considering professional liability insurance is a must depending on the services rendered.
The difference in insurance between sole proprietors and independent contractor is that sole proprietors might have employees working for them. In this case, workers’ compensation insurance will be necessary.
This insurance will cover the medical bills, missed wages, and ongoing care expenses for workers if they suffer an injury or are sick due to work.
Suppose an individual is a content writer obliged to write four articles per week for ABC company. Here, the individual is an independent contractor.
If an individual writes a novel on the side and decides to publish it, company ABC has nothing to do with it. All the profit belongs to the writer alone. This means the individual is a sole proprietor.
Now, this example is sure to spark a question - can a sole proprietor be an independent contractor?
And the answer to the question is yes.
It is pretty common for small business owners to function as sole proprietors and independent contractors. It all depends on the nature of the business relationship and the tax structure.
In the above example of a content writer/ book writer, you can see that the same individual can be an independent contractor and a sole proprietor. Here, the individual pays both income taxes and payroll taxes.
Because the income includes earnings from the book publishing plus earnings from writing blogs for the company ABC.
Let us take another example to understand further.
A software developer starts a sole proprietorship business. Hence, it does not require setting up a separate corporation. Also, it allows the filing of personal and business taxes on Form 1040.
If the individual outsources services to corporate clients, they might establish an independent contractor relationship with the developer. It would mean:
However, if the developer decides on creating and selling an app, they would no longer be independent contractors. It is because they would not earn anything from any business. But each time someone downloads the app, they would have an income.
Here, the developer will not receive Form 1099-MISC. Instead, using Schedule C (Form 1040), reporting the app-related revenue would be necessary.
Such questions can create utter confusions when you plan to start planning your hiring process.
This FAQ section is here to address your concerns relating to independent contractors and the difference between self-employed and sole proprietorship.
Being self-employed is a common aspect between independent contractors and sole proprietors. In other words, both independent contractors and sole proprietors are self-employed individuals.
However, while sole proprietors and independent contractors are self-employed, all self-employed people might not be sole proprietors. For example, freelance designers are self-employed but not necessarily sole proprietors. They are mostly independent contractors.
Yes. Being a self-employed sole proprietor is possible because they do not have an employer or work in a company as an employee. As individuals run their own businesses, you can classify them as self-employed business owners.
An independent contractor may be a sole proprietor, depending on their type of work and compensation.
Most independent contractors work for more than one client at the same time. They offer their services on a freelance basis. A few other independent contractors provide contracting services in addition to their full-time or part-time work as employees.
If an individual is the sole owner and operator of a business, they are a sole proprietor. So, if independent contractors consider themselves the sole owner of a company, they might use the term sole proprietor.
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