You're probably thinking about the freedom. No boss breathing down your neck, picking your own hours, and finally charging what you’re actually worth instead of taking a measly hourly cut from a massive corporation. It sounds like the dream. But honestly? Most people who try to figure out how to become a contractor wash out within the first year because they treat it like a job search rather than building a literal infrastructure.
It’s messy.
One day you're a plumber, the next you're an accountant, and by Wednesday you're a legal compliance officer trying to figure out why your state’s Secretary of State website looks like it was designed in 1998. If you want to make this work, you have to stop thinking about the craft—the building, the coding, the consulting—and start thinking about the entity.
The Legal Reality of Your New Life
First off, you aren't a person anymore. Well, you are, but the IRS doesn't want to hear about "you." They want to hear about an entity. Most beginners rush into a Sole Proprietorship because it's easy. It’s basically just you doing stuff. But that's a trap. If you accidentally hit a water main or delete a client's database, your personal truck and your house are on the line.
That’s why you almost always need an LLC.
An Limited Liability Company creates a "corporate veil." It’s a wall. On one side is your personal life; on the other is the business. Setting this up varies wildly by state. In California, you’re looking at an $800 annual franchise tax just for existing. In Wyoming? It’s practically pocket change. You need to head to your specific state's business portal—usually under the Secretary of State—and file your Articles of Organization. Don't pay those "we'll file for you" sites $500. It takes twenty minutes.
Once you have that, get an EIN. That's an Employer Identification Number. It's like a Social Security number for your business. It’s free from the IRS website. Do not pay a third party for this. If a site asks for money for an EIN, close the tab immediately.
Why Licensing Isn't Optional
In the world of general contracting—the hammer and nails kind—you can't just buy a tool belt and start charging people. Most states have incredibly strict requirements. Take the NASCLA (National Association of State Contractors Licensing Agencies). They provide a standardized exam that many states accept, but even then, you're looking at different "classes."
- Class A: The big dogs. You can build skyscrapers and bridges.
- Class B: Commercial and residential. Think houses and office buildings.
- Class C: Specialty. You do one thing, like HVAC or electrical, and you do it well.
If you’re a software contractor, "licensing" is less about the government and more about certifications and indemnity insurance. But for the trades? You need a bond. A surety bond is basically a guarantee to the state that if you mess up and refuse to fix it, there’s a pot of money to pay the client. It’s not insurance for you. It’s protection for them.
You’ll also need General Liability insurance. If you drop a ladder on a homeowner's Tesla, you don't want to pay for that out of your kid's college fund.
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The Money Part Everyone Hates
Let's talk about the "Tax Gap." When you’re an employee, your boss pays half of your Social Security and Medicare taxes. When you're the boss, you pay both halves. It’s called the Self-Employment Tax. It’s roughly 15.3%.
People forget this.
They land a $5,000 contract and spend $5,000. Then April rolls around and they realize they owe the government $1,200 they don't have. You have to be disciplined. Open a separate business bank account. Never, ever mix your grocery money with your business revenue. It makes "piercing the corporate veil" too easy for lawyers if you get sued, and it makes your taxes a nightmare.
You should be setting aside at least 25% to 30% of every single check into a high-yield savings account. It’s not your money. It’s the government’s money you’re just holding onto for a few months.
Finding Your First Real Clients
Marketing is where most contractors die. You can be the best carpenter in the Tri-State area, but if your website looks like a scam and you don't answer your phone, you're going broke.
Stop relying on Thumbtack or Angi. Those platforms are often a "race to the bottom" where you're competing with guys who don't have insurance and undercharge because they're desperate. Instead, look at "referral loops."
If you're a flooring contractor, go make friends with the local realtors. They are constantly asked by buyers, "Hey, do you know someone who can fix these hardwoods?" If you're a freelance developer, don't just pitch on Upwork. Go to GitHub, find open-source projects used by mid-sized companies, and contribute. Show your value before you ask for a check.
Networking isn't about awkward mixers with cold shrimp. It’s about being the person who solves a specific problem.
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Mistakes That Will Kill Your Momentum
I've seen guys land a massive $50k contract, buy a brand-new Raptor with a "business lease," and then realize the client pays on "Net-90" terms. That means you do the work today, and they pay you in three months.
Can you survive for 90 days without a paycheck while paying for materials and gas?
Cash flow is the heartbeat of contracting. You need a contract that specifies "milestone payments."
- 30% upfront for materials and mobilization.
- 40% at the halfway mark.
- 30% upon final walkthrough.
Never start a job without money hitting your account first. "I'll pay you Friday" is a lie told by people who haven't managed their own cash flow. You aren't a bank. Don't offer credit to your clients unless you have the capital to back it up.
The Reality of Scaling
Eventually, you'll hit a wall. You can only work 24 hours a day, and even then, you'll burn out. To grow, you have to hire. But hiring brings in Workers' Comp insurance, payroll taxes, and the headache of managing people who might not care about the quality as much as you do.
Many contractors stay "solopreneurs" on purpose. They realize that making $150k alone is better than managing ten people to make $200k. There's a "dead zone" in business growth where you're too big to do it yourself but too small to afford a full-time office manager. It’s a dangerous place to be.
Moving Forward and Getting Started
If you're serious about how to become a contractor, stop researching and start filing. The information age has a way of paralyzing people with "what ifs."
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- Check your state's licensing board. Find out the exact exam requirements. If you're in a trade, buy the study guide today. Don't wait.
- Incorporate your business. Go to your Secretary of State website and file for an LLC. It usually costs between $50 and $500 depending on where you live.
- Open a business bank account. Do not use your personal account for even one business transaction. Keep the paper trail clean from day one.
- Get insured. Call a local commercial insurance agent. Tell them exactly what you plan to do. Get a quote for General Liability and a Surety Bond if required.
- Draft a standard contract. Don't use a handshake. Use a service like Rocket Lawyer or find a local attorney to write a "Master Service Agreement" that protects you from scope creep and non-payment.
- Set your rates based on math, not feelings. Calculate your overhead (insurance, gas, software, taxes, health insurance) and add your desired profit on top. If the number feels "too high," you're probably finally charging the right amount.
Being a contractor is about being a professional. Professionals have systems. Amateurs have "gigs." Decide which one you want to be before you pick up the phone.