As you move from set up to operations you need to be able to move quickly, manage your cash flow, and report your income appropriately.  There are many forms already developed to assist you with this process.  In this chapter we will provide an overview of these forms and an appendix with sample forms for you to use to operate your business.

Agreements  – Independent Contractor Agreement


When engaging with a business, we recommend you have an agreement in place that outlines your role, your rate, and the terms of your engagement.  This agreement is called an Independent Contractor Agreement.  Have this agreement in place prior to starting your work so that you have a clear understanding of the requirements of the project.  It’s typical for the business that engages you to initiate this agreement, but if they are unfamiliar with this type of engagement you can initiate from your end.

A basic Independent Contractor Agreement will cover at a minimum the following key areas:

  • Definition of the parties to the contract
  • The duration of the contract (term)
  • Summary of the Services to be provided
  • Summary of the fees to be paid including reference to sales tax or VAT as appropriate
  • The location in which the assignment is to take place
  • Arrangements for periodic update meetings between client and consultant
  • Reimbursement of expenses incurred by the consultant
  • Commissions, gift benefits or other inducements
  • Arrangements for call out
  • Training either training of the consultant or by the consultant
  • Warranties
  • Site Security Requirements
  • Professional indemnity insurance
  • Ownership of intellectual property
  • Confidentiality
  • Restrictions
  • Offers of employment
  • Independence
  • Publicity
  • Termination
  • Absence of the consultant and rights of substitution
  • Force majeure
  • Waiver of Remedies
  • Assignment of the agreement
  • Notice relating to the agreement
  • Compliance by employees or sub-contractors of the consultant
  • Law applicable and jurisdiction

In addition, the Independent Contractor Agreement may have one or more appendices that record and summarize the key components of the contract including:

  • A start date and a termination date
  • A detailed definition of services and deliverables
  • Details of fees, terms of business and the basis of payment
  • Arrangement for the submission of invoices
  • Key contact names and numbers

Operations – Cash Flow Management


Once you have your agreement in place you will begin performing and will start receiving revenue.  It’s now time to manage your income and operating expenses.  Your revenue will come from an Invoice that you generate for your services.  As an Independent Contractor you should expect to be paid once or twice a month.  You should set up your billing terms as part of your independent contractor agreement.  Typically, the terms are billing once per month at Net 15 or 30 terms (the number of days in which it is allowable for the business to make payment on the invoice) or Milestone billing based on project deliverables.

You generate the invoice based on the terms of your agreement, whether it’s fixed price or labor hour and provide the details as outlined in the agreement to allow for an audit trail if you or the business ever encounters an audit.  A Sample Invoice is provided in the appendix.

Now you must manage and track your income for tax and reporting purposes.  You may use the Sample Cash Flow Spreadsheet to track your income and expenses.  It’s important to talk with a professional tax consultant to understand your tax liability and reporting requirements.

Tax Compliance

Independent Contractors qualify as self-employed.  As a self-employed individual, generally you are required to file an annual return and pay estimated tax quarterly.

Self-employed individuals generally must pay self-employment tax (SE tax) as well as income tax. SE tax is a Social Security and Medicare tax primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. In general, anytime the wording “self-employment tax” is used, it only refers to Social Security and Medicare taxes and not any other tax (like income tax).

Before you can determine if you are subject to self-employment tax and income tax, you must figure your net profit or net loss from your business. You do this by subtracting your business expenses from your business income. If your expenses are less than your income, the difference is net profit and becomes part of your income on page 1 of Form 1040. If your expenses are more than your income, the difference is a net loss. You usually can deduct your loss from gross income on page 1 of Form 1040. But in some situations your loss is limited.  A Tax guide for small businesses is available at  Reference Publication 334, Tax Guide for Small Business (For Individuals Who Use Schedule C or C-EZ) for more information or contact your tax professional.

You have to file an income tax return if your net earnings from self-employment were $400 or more. If your net earnings from self-employment were less than $400, you still have to file an income tax return if you meet any other filing requirement listed in the Form 1040 Instructions.


How Do I Make My Quarterly Payments?

Estimated tax is the method used to pay Social Security and Medicare taxes and income tax, because you do not have an employer withholding these taxes for you. The Form 1040-ES, Estimated Tax for Individuals, is used to figure these taxes. Form 1040-ES contains a worksheet that is similar to Form 1040. You will need your prior year’s annual tax return in order to fill out Form 1040-ES.


Use the worksheet found in Form 1040-ES, Estimated Tax for Individuals to find out if you is required to file quarterly estimated tax. Form 1040-ES also contains blank vouchers you can use when you mail your estimated tax payments or you may make your payments using the Electronic Federal Tax Payment System (EFTPS). If this is your first year being self-employed, you will need to estimate the amount of income you expect to earn for the year. If you estimated your earnings too high, simply complete another Form 1040-ES worksheet to refigure your estimated tax for the next quarter. If you estimated your earnings too low, again complete another Form 1040-ES worksheet to recalculate your estimated taxes for the next quarter.


How Do I File My Annual Return?

At Kdragonfly we recommend you file your Annual Tax Return with the assistance of a tax professional.  To file your annual tax return, you will need to use Schedule C or Schedule C-EZ to report your income or loss from your business as an Independent Contractor.  The instructions in Schedule C may be helpful in filling out the form.

Small businesses and statutory employees with expenses of $5,000 or less may be able to file Schedule C-EZ instead of Schedule C. To find out if you can use Schedule C-EZ, see the instructions in the Schedule C-EZ form.


To report your Social Security and Medicare taxes, you must file Schedule SE (Form 1040), Self Employment Tax. Use the income or loss calculated on Schedule C or Schedule C-EZ to calculate the amount of Social Security and Medicare taxes you should have paid during the year. Instructions for Schedule SE may be helpful in assisting you calculate the amount of Social Security and Medicare taxes you owe.



As an independent Consultant all of your insurance will be your responsibility.  There are two different types of insurance to consider with several sub categories within each.  The first is Health Insurance.  This provides for your medical insurance benefits.  The second is Business Insurance.  This provides for your business protection.  An outline of each of the insurance offerings is below.  We encourage you to meet with an insurance professional and legal professional to outline your business and receive a good understanding of which of the coverage is right for you.  The insurance professional can provide you with rates and package offerings that are tailored to the needs of your Independent Consultant business.

Keep in mind that you are your own business entity now and it’s up to you to protect yourself.  Weigh the risk vs. the reward of going forward with any of these policies.


For Independent Consultant generally the best value is to purchase health insurance in the Individual Market if the option to join a Spouse Plan isn’t available.  In the event your consultant practice has employees you may also be eligible to purchase in the Group Market.  In order to purchase in the group market you must have 2 or more employees.  There may also be state options available to you such as in Colorado.  Colorado offers Cover Colorado coverage, which offers a limited number of plans to choose from and is based on a sliding scale available based on tax reporting and payroll documentation.


There are several different types of Business insurance available.  Below is a list of the different types of coverage with a brief description.

Commercial Property – Commercial Property is the “first-party” coverage designed to protect the assets of the commercial insured.  It refers to the insurance on buildings and it’s contents.  It covered two major types of property – building and person property and causes of loss.

Commercial General Liability – Commercial General Liability coverage is known as “third party” coverage.  This means it protects from claims filed by others due to the insured negligence.  It covers bodily injury and property damage primarily.

Business Auto – Commercial Business Auto coverage protects businesses against financial loss that can occur because of the ownership and use of vehicles.  The policy lists who is covered, what vehicles are covered and what types of activities are not covered.  There are multiple coverage options available from first party comprehensive coverage to third party tort liability coverage.

Worker’s Compensation – Workers Compensation insurance and employers liability insurance policies provides that the employer is responsible for paying benefits to an employee injured on the job, whether or not the party was negligent.  It covers injury, disease, disability and death.  It’s intended to be an employee’s exclusive remedy for claim against their employer.

Employment Practices Liability – Any entity that has employees benefits from Employment Practices Liability coverage.  This covers against sexual harassment claims, wrongful termination, and discrimination in hiring, firing, promotion and compensation claims.  It’s an important element to consider carefully if employees are part of your consultancy.

Errors and Omissions – Errors and Omissions (E & O) Professional Liability insurance is important for professionals and independent consultants form whom incorrect advice or a failure to perform professional services could lead to a lawsuit.  Even if you haven’t made a mistake you can be sued.  This policy will cover legal fees, protecting you and your business from potentially crippling costs.  This policy covers policy holder’s alleged failure to perform, cause of financial loss and error or omission in the service or product.

Business Owner’s Policy – Business Owner’s Policies are a combination of General Liability and Commercial property policies and will often both increase limits found in standard ISO forms and will include non-typical items.  The individual coverage can be modified to the needs of a client and are exceptionally good value as they avoid the carrier costs of issuing and handling multiple policies.


As with any business decision it is up to you to determine what insurance is best for you.  This book is not intended to replace guidance from a tax professional or interpret the tax laws in any way.  The following information on tax compliance has been taken from the internal revenue service website on self-employed tax requirements.  Additional information can be found at and by contacting your qualified tax professional.