Labor and Employment

Legal Obligations of the Self-Employed

Self-employment is attractive for many reasons. You'll be the boss. You'll be able to do the type of work you love. You'll be able to choose your clients. You can work when and where you want. However, self-employment also comes with many responsibilities, including legal obligations. Just like any more traditional business, a self-employed person must obey a wide range of federal, state, and local laws and regulations.

The Self-Employed May Have to Register

Many states, counties, and cities require businesses to register with a specific government agency, often for tax purposes. A business operated solely by one person may be exempt from this requirement. Also often exempt is an unincorporated partnership or business.

Some state and local governments require that a self-employed person's business have a name. This obligation often does not apply to businesses that have no employees. Likewise, the Internal Revenue Service requires self-employed individuals to have a federal employer identification number if they have any employees or have certain other characteristics.

The Self-Employed May Need a License

State, county, and city governments require professionals in certain fields to have a license to conduct business within their boundaries. Lawyers, plumbers, barbers, massage therapists, and real estate brokers are examples of types of self-employed people who may need a license. If you go into business without the required license, you may be liable for fines or criminal penalties.

The Self-Employed Must Follow IRS Regulations

The IRS requires that self-employed employers withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment taxes on wages paid to their employees. IRS regulations do not require withholding or payment of any taxes on payments made to independent contractors.

The IRS has specific rules that spell out who qualifies as an employee and who qualifies as an independent contractor. Under certain circumstances, a self-employed person must file a 1099-MISC form for payments made to an independent contractor. These forms let the IRS know how much income a contractor receives.

The Self-Employed Must Pay Estimated Taxes

The IRS requires most self-employed people to calculate their estimated taxes and make quarterly tax payments to the U.S. Treasury. Some states also require that self-employed people make quarterly estimated tax payments.

The Self-Employed May Have Other Legal Obligations

Self-employed people must follow the terms of any legal contract that they sign. They are also legally responsible for any negligent or criminal act. For example, a self-employed roofing contractor may be liable for water damage if the roofer doesn't protect a house from rain while replacing shingles. Many self-employed people buy insurance to cover these types of business losses.

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