Sole proprietor vs. Independent contractor

Are there actual differences between a sole proprietor and an independent contractor? Employers often incorrectly use independent contractors in place of a sole proprietor. And even though there are similarities between the two kinds of service providers, there are distinct differences.

Before you start a business, it is important to understand the differences between the two business models. This article highlights everything you need to know about sole proprietorship and independent contractors.

Who is a sole proprietor?

A sole proprietor is a businessperson who owns and manages an unincorporated business entity. They solely bear the brunt of a successful or a failed business and are also responsible for filing taxes.

Who is an independent contractor?

An independent contractor is any individual that provides services for organizations, individuals and any business entity but not as an employee. They usually provide services to entities based on agreed contract terms. However, they are responsible for the success or failure of the business, like sole proprietors. Also, they dictate the service’s place, time, and partial terms and file their taxes.

Differences between a sole proprietor and an independent contractor

While sole proprietors and independent contractors have some similarities, they differ in quite a number of ways. Sole proprietors and independent contractors are self-employed individuals who cannot be termed employees.

While their primary difference is in the method of documenting their profits and filing taxes, other notable differences are,

Service provision

For sole proprietors, they provide services for products that are usually not based on any written contract. Sole proprietors are basically traders selling their goods and services in a particular market.

Unlike sole proprietors, independent contractors offer their services to clients who signs a contractual agreement with them. They are usually freelance providers in the IT industry, creatives and other forms.

Income generation

Sole proprietors generate income by selling their products. While they may also do some contractual work, their primary income comes from product sales. Also, they are obligated to track their income and expenditures throughout the year.

On the other hand, independent contractors provide specific services to organizations based on agreed contract terms. They also receive a 1099 form from organizations that pay over 600 USD.

Taxes

For independent contractors, organizations whose service cost exceeds 600 USD at the end of the tax year must fill out Form 1099. The independent contractors return and submit the forms to the IRS before the beginning of the next tax year.

Taxation for sole proprietors is more straightforward than for independent contractors. They obtain Form 1040 to report their annual income tax returns.

Can I be a sole proprietor and an independent contractor?

Yes, you can be a sole proprietor and an independent contractor. While the business model appears very similar, the difference lies in the method of receiving income.

For instance, a graphic designer may be under contract with a company to create designs monthly. At the same time, the graphic designer launches a design school to train designers. For organizations, the graphic designer is an independent contractor. Also, the graphic designer is a sole proprietor who runs and manages a design school.

A sole proprietor and independent contractor business model offers individuals freedom like never before. However, like every other business, it can be challenging, especially for new business owners.

How can Skuad help?

Skuad is a global employment and payroll platform that enables organizations to hire full-time employees and contractors in over 160 countries without setting up subsidiaries or legal entities. Skuad’s platform also helps organizations onboard talent, manage payroll, and ensure compliance with country-specific employment laws and tax regulations.

In addition, we handle your entire employment lifecycle so that you can scale your business operations compliantly, with reduced efforts and a top-notch HR administration.

To know more about Skuad, book a demo today.