When Do You Need to Register as Self-Employed?

Operating as a self-employed individual, as an independent contractor or a small business owner, carries a distinct set of responsibilities. Unlike a traditional employee, a self-employed person is their own boss, which means they are also their own payroll and compliance department. This independence requires a direct relationship with government agencies for tax and registration purposes, making awareness of your duties paramount.

Determining Your Self-Employment Status

Before addressing registration, you must correctly classify your working relationship. The Internal Revenue Service (IRS) uses common law rules to differentiate between an independent contractor and an employee. These rules center on the degree of control a business has over the worker, and all evidence of this control and independence is examined.

The first area is behavioral control, which looks at whether the business has the right to direct and control how the worker performs tasks. This includes the level of instruction provided, such as when and where to work or what tools to use. If a company provides detailed training to perform the job in a specific manner, it suggests an employer-employee relationship, while a worker who uses their own methods is more likely an independent contractor.

Financial control is another category, focusing on the business aspects of the worker’s job. An independent contractor has a significant investment in the equipment they use, can realize a profit or loss, and has unreimbursed business expenses. They also make their services available to the broader market. An employee is paid a set wage and has their business expenses reimbursed by the employer.

Finally, the relationship of the parties is considered, which looks at how the worker and business perceive their interaction. Written contracts describing the intended relationship are a piece of evidence. The presence of employee-type benefits, such as health insurance or paid vacation, indicates an employment relationship. The permanency of the relationship is also a factor; a continuous relationship suggests employment, whereas work for a specific project points toward independent contractor status. If uncertainty remains, you can file Form SS-8 with the IRS for an official determination.

Federal Registration Triggers and Deadlines

The trigger for federal tax obligations for a self-employed individual is based on income. You are required to file an annual tax return and pay self-employment tax if you have net earnings of $400 or more from self-employment. Net earnings are your gross income from self-employment minus your ordinary and necessary business expenses. This $400 threshold applies to the total income from all your self-employment ventures combined.

Other business activities can also trigger the need to obtain an Employer Identification Number (EIN), which the IRS uses to identify business entities for tax purposes. You will need an EIN if you:

• Hire your first employee.
• Operate your business as a corporation or partnership.
• File for bankruptcy.
• Create a tax-deferred pension plan.

The deadline for federal registration is tied to your business activities, not a fixed calendar date. You should obtain your EIN before you are required to file your first business-related tax return or make your first quarterly estimated tax payment. If you hire employees, you must have the EIN before your first payroll date.

Information Required for Federal Registration

For most self-employed individuals, federal registration involves obtaining an Employer Identification Number (EIN). An EIN serves as the federal tax ID for any business entity, including a sole proprietorship that needs one to open a business bank account or file certain returns. Before applying, you must gather the information detailed on Form SS-4, Application for Employer Identification Number.

You will need to provide the following information:

• The legal name of the business.
• The Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN) of the sole proprietor, a general partner, or a principal officer.
• Any trade name or “Doing Business As” (DBA) name that is different from your legal name.
• The business’s mailing address and physical location.
• Your business structure, such as sole proprietor, partnership, or corporation.
• The reason you are applying for the EIN.
• The business start date, which is the date you first began operations or acquired the business.

The Federal Registration Process

After gathering the necessary information from Form SS-4, you can apply for an EIN. The IRS offers several submission methods, with the online application being the most efficient. This process uses the IRS’s online EIN assistant, and upon successful completion, your EIN is issued immediately.

Applications can also be submitted by fax or mail. To apply by fax, complete Form SS-4 and send it to the appropriate fax number listed on the IRS website. The IRS will fax your EIN back to you within four to five business days.

The final method is to mail the completed Form SS-4 to the designated IRS service center. This is the slowest method, with processing times of four to six weeks. After submission, you will receive a formal notice with your assigned EIN, which you should keep with your business records.

State and Local Registration Considerations

Securing a federal Employer Identification Number is often just the first step in the business registration process. Your obligations extend to the state and local levels, where various licenses and permits may be required to operate legally. These requirements are not uniform and differ based on your specific location and the nature of your business.

A common requirement is registering a “Doing Business As” (DBA) or trade name if you operate your business under a name different from your own. This registration is handled at the state or county level and informs the public who is behind the business. Many cities and counties also mandate a general business license or operating permit, which often comes with an annual fee.

If your business sells goods or certain services, you will need to obtain a state seller’s permit, also known as a sales tax permit. This permit allows you to collect sales tax from customers on behalf of the state. To understand the specific requirements for your business, contact your state’s Secretary of State or Department of Revenue, as well as your local city and county clerk’s offices.