Question: What's the Difference Between a Sole Proprietor and an Independent Contractor?
Here's the short answer - 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.
How does a sole proprietor differ from an independent contractor?
They are essentially the same: both are self-employed. The big difference is in how they are considered for certain taxes. Here's what I mean: 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. To clarify:
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. in other words, a sole proprietor is the default business type, for income tax purposes. If you start a business, count business expenses and income separately from personal expenses and income, and you do nothing to register your business with your state, you're a sole proprietor.
An independent contractor is someone who is working for someone else, but who is not an employee; the independent contractor receives a 1099-MISC at the end of the year, instead of a W-2, showing total income received from companies for whom the contractor has worked. An independent contractor can be any type of business entity (sole proprietor, corporation, LLC, partnership), but most independent contractors are sole proprietors.
Since the independent contractor is not an employee, no payroll taxes are deducted from payments to the contractor, so the contractor is responsible for paying self-employment taxes (Social Security and Medicare), along with income taxes.
How Can I Be Both a Sole Proprietor and an Independent Contractor?
Both independent contractors and sole proprietors are business owners. They both keep track of business income and expenses; they both file income taxes using Schedule C (unless a different business type is chosen), and both pay self-employment taxes.
You can see that these two designations are talking about the same business, and the differences are really only are relevant to how income is received, so you can be both. For example, a sole proprietor might receive 1099 income from a contract employer and also receive other business income from sales of a product or service. At the end of the year, all income is included in calculating the business's income taxes.