So maybe you have kicked around the idea of venturing on your own and being your own boss.

But, the process seems a little daunting … or just downright scary.

Remember, becoming an independent contractor is a big step and is a decision you should not take lightly. But, with it comes a certain amount of freedom of being able to call your own shots instead of having someone do it for you.

The first real step in successfully becoming an independent contractor is setting up an S-Corp.

By definition, an S-Corp is a closely held corporation that makes a valid election to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code.

In order to set up an S-Corp., you first want to reach out to an accountant. You can do it yourself by filling out a Form 2553, but getting an accountant to help with help ensure there are no errors in the form and that you are following the steps.

The S-Corp has nice tax benefits and still gives you liability protections that come with being a corporation. Because income and losses are passed through shareholders and included on individual tax returns, there is only one level of federal tax to pay. It is likely you will be the only shareholder, so there is little to worry about in that respect.

Since you won’t have any inventory, you can use the cash method of accounting. Income is taxable when it is received, and expenses are deducted when they are paid.

The benefits:

  • You are truly independent. You can run your business the way you want, with no one telling you what to do.
  • You get all of the profits of the business. You don’t have to share them with anyone.
  • You can decide how much money you take out of the business. You don’t have a paycheck and you don’t have to pay taxes on what you take out (the taxes are paid by the business based on its profits).
  • You can take deductions for expenses that are not deductible to you personally, like driving expenses, home business expenses, and depreciation on purchases of business property and equipment.

The drawbacks:

  • If you have all the profits, you also have all of the losses.
  • You don’t have benefits given to employees, like health care.
  • Paying Social Security and Medicare taxes becomes your personal responsibility (it’s called self-employment tax). These taxes aren’t withheld from your paycheck (no paycheck, remember?)