How to Start as an Independent Contractor in California

California is a hub for entrepreneurship, startups, and freelance professionals. With its dynamic economy and diverse industries, many workers are choosing to operate as independent contractors. Becoming self-employed in California allows you to take control of your work, set your rates, and offer services to clients across the state but it comes with responsibilities and legal requirements.

Disclaimer: This article provides general information and is not legal advice. Always consult official resources or a legal professional before making business decisions.

Sole Proprietor vs Independent Contractor

In California, if you provide services on your own, you are considered self-employed. Setting up as a sole proprietor is one of the simplest ways to operate legally.

A sole proprietorship is a business owned and run by a single individual. It allows you to:

• Deduct business expenses to reduce taxable income.

• Manage your clients and workflow independently.

• Operate without complex corporate structures or formal registration with the Secretary of State (unless using a business name other than your own).

Keep in mind, as a sole proprietor, you are personally liable for your business debts, your assets could be at risk if the business faces financial obligations.

Understanding Assembly Bill 5 (AB5)

In 2020, California implemented AB5, a law designed to clarify whether workers are employees or independent contractors. AB5 introduced the ABC test, which determines a worker’s classification for labor, unemployment insurance, and wage law purposes.

The ABC Test

To qualify as an independent contractor under California law, all three conditions must be met:

1. You work without control or direction from the hiring company.

2. Your work is outside the core business of the company you contract for.

3. You have an established independent business offering similar services.

Other legal frameworks, like the IRS “control” test for federal taxes or California’s “manner and means” test, may also apply in specific contexts.

Registering a Sole Proprietorship in California

Choosing a Business Name

If you operate under a name other than your personal legal name, you must file a Fictitious Business Name Statement with your county recorder. Make sure the name:

• Isn’t already in use or too similar to another business.

• Is not misleading or offensive.

• Complies with trademark rules (check the USPTO TESS database).

Licensing and Permits

Depending on your business activities, you may need specific licenses or permits. California’s CalGold database provides county- and city-specific requirements. Examples include:

• Health permits for food services.

• Professional licenses for contractors or financial advisors.

• Local business registration requirements.

Employer Identification Number (EIN)

While a sole proprietor without employees can use a Social Security number for tax purposes, obtaining an EIN is recommended:

• Required by some banks to open a business account.

• Helps protect your Social Security number.

• Necessary if you plan to hire employees in the future.

General Liability Insurance

Since sole proprietors are personally liable, business liability insurance is highly recommended. It protects you against unexpected claims or damages related to your work.

Taxes for California Sole Proprietors

As a sole proprietor, your business income is reported on your individual tax return:

1. Federal taxes: Use IRS Form 1040 Schedule C to report business profits and expenses.

2. California state taxes: Nonresidents or residents with out-of-state income may need Schedule R to calculate California-sourced income.

3. Estimated taxes: Pay quarterly using California Form 540-ES to cover income and self-employment taxes.

Keep accurate records of income, expenses, and deductions to simplify tax filing and avoid penalties.

Key Takeaways

• California is a prime location for independent contractors and self-employed professionals.

• Starting as a sole proprietor is quick and flexible, with minimal registration requirements.

• AB5 and the ABC test define your legal status and affect labor law compliance.

• Proper planning for business names, licenses, insurance, and taxes is essential to operate safely and legally.

Once you complete these steps, you are ready to start offering your services and building your independent career in California.

Looking for opportunities as a sole trader? Check out our remote opportunities in sales or customer care agents.