Becoming an independent consultant can be a rewarding career because of the ability to work for various clients at the same time, while working independently and even from home, and determining your own hours and rate of pay. However, there can be several forms involved, depending on the nature of the business, the location of the practice and individual state regulations. As of December 2010, the Internal Revenue Service (IRS) requires an independent consultant to fill out at least three pertinent forms regardless of state. There is a fourth form that is optional. The forms are available for downloading at the IRS website.
Form SS-4 is the application to apply for an employer identification number (EIN). This nine-digit number is different from a Social Security number, and is assigned by the IRS. The EIN is tied to the name of the independent consultant’s business. A consultant will place this tax ID number on all invoicing from clients. Many independent consultants work as a sole proprietorship. However, if an independent consultant has at least one employee or is offering services or products that are taxed, then the IRS will require an EIN.
When a company hires an independent consultant, it will have the consultant first fill out Form W-9, which is required by the IRS. The form is a request for the consultant's tax ID number. Only a United States citizen, a resident alien and a company organized or created in the United States should fill out this form. By completing the form, independent consultants are verifying that their personal information (name, address, citizenship, tax ID number) is correct.
Form 1099-MISC is used to report an independent consultant’s income if the consultant is paid $600 or more as a nonemployee during a calendar year in the course of a trade, rent, medical or business to others for services, and not wages. There will not be any deductions for Social Security, medical, state or federal income taxes recorded on this form. The only exception is if an independent consultant doesn’t provide a tax ID number, then the consultant is subject to a 28 percent withholding rate on income received.
If independent consultants have a business partnership with another person, then they may choose to fill out Form 8832 to form a limited liability company, which has tax advantages, such as no federal taxes. This form is optional and not required by the IRS. Independent consultants who fill this form out can still be taxed as a sole proprietorship if they choose.