The terms “sole proprietor” and “independent contractor” are both used to discuss small business owners. So, are they the same thing? What is the difference?
Here is the simple answer:
The terms “sole proprietor” and “independent contractor” are both generally used to describe single-person businesses, but they are used in different contexts.
You can be both a sole proprietor and an independent contractor. You can be a sole proprietor as a taxpayer, paying your taxes on Schedule C, along with your personal income taxes.
At the same time, you can be an independent contractor as it relates to working for someone else and receiving a 1099-MISC to show your earnings, instead of a W-2 (received by employees). Your 1099-MISC income is included in your Schedule C, along with other business income you receive.
Both are self-employed. The big difference is in how they are considered for certain taxes. The sole proprietor is a type of business for income tax purposes, and an independent contractor is the opposite of an employee, for payroll tax purposes.
A sole proprietor is a one-person business that “has not” registered with a state as a business entity, such as a corporation, partnership, or LLC; and, an independent contractor is someone who is working for someone else and who provides services, but who is not an employee.
According to the IRS: “People such as doctors, dentists, veterinarians, lawyers, accountants, contractors, subcontractors, public stenographers, or auctioneers who are in an independent trade, business, or profession in which they offer their services to the general public are generally independent contractors. However, whether these people are independent contractors or employees depends on the facts in each case. The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. The earnings of a person who is working as an independent contractor are subject to Self-Employment Tax.”
If you have any questions or need legal advice, please contact JV LAW GROUP today at (714) 752-3270 or via email info@jvlawgroup.com
