Definition
An Independent Contractor is a person or entity engaged in a work or service agreement under which they perform tasks for a client without becoming an employee. They operate under their own business name, invoice their clients for work completed, and must comply with a set of mutually agreed-upon terms and conditions specified in the contract. These contractors are responsible for their own self-employment taxes, health benefits, and any business-related expenses.
Examples
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Real Estate Salesperson: Collins, a real estate salesperson, is an independent contractor for Broker Baker. Collins operates their business autonomously, handling their own taxes and expenses. Due to their independent status, they are not eligible for unemployment insurance when they have not received income as they would be as a traditional employee.
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Freelance Graphic Designer: A graphic designer engages with multiple clients to provide design services, charging hourly or per-project fees. The designer is responsible for managing their own business operations, from marketing their services to invoicing clients for work performed.
Frequently Asked Questions
Q1: What is the key difference between an employee and an independent contractor?
A: An employee works directly for an employer who controls what will be done and how it will be done, whereas an independent contractor operates as a separate entity providing services on terms set by a contract.
Q2: What tax obligations do independent contractors have?
A: Independent contractors are required to pay self-employment taxes, which cover Social Security and Medicare, in addition to income taxes. They must typically make estimated tax payments throughout the year.
Q3: Are independent contractors eligible for benefits such as unemployment insurance?
A: No, typically independent contractors do not qualify for unemployment insurance, health benefits, or worker’s compensation that employees normally would receive.
Q4: Can independent contractors deduct business expenses on their taxes?
A: Yes, independent contractors can deduct legitimate business-related expenses including office supplies, travel costs, and professional services to reduce their taxable income.
Q5: How can you determine if someone is an independent contractor or an employee?
A: The distinction is made based on factors related to the degree of control the hiring party has over the work process and financial aspects, such as who provides tools and work space and how payments are handled.
Related Terms
Self-Employment Tax
A tax consisting of Social Security and Medicare taxes primarily for individuals who work for themselves.
1099 Form
The tax form used to report income paid to non-employees, including independent contractors, freelancers, and others.
Contractor Agreement
A formal written document that lays out the terms of the work engagement, rights, and obligations of both the client and the contractor.
Freelance
A type of self-employment where a person works for different companies or clients without long-term commitments, often used interchangeably with independent contractor in some contexts.
Gig Economy
A labor market characterized by the prevalence of short-term contracts or freelance work as opposed to permanent jobs.
Online Resources
- IRS Website on Self-Employed Individuals
- Freelancers Union
- National Association for the Self-Employed (NASE)
References
- Internal Revenue Service. “Self-Employed Individuals Tax Center.” IRS, https://www.irs.gov/businesses/small-businesses-self-employed/self-employed-individuals-tax-center.
- Freelancers Union. “Resources.” Freelancers Union, https://www.freelancersunion.org/resources/.
Suggested Books for Further Studies
- “The Freelancer’s Bible: Everything You Need to Know to Have the Career of Your Dreams—On Your Terms” by Sara Horowitz and Toni Sciarra Poynter: This book helps freelancers and independent contractors navigate their careers.
- “Tax Planning Strategies for the Independent Contractor” by Paul McCollum: A detailed guide on managing taxes effectively as an independent contractor.
