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By Type (8)

Contents By State By Type (8) What is an Independent Contractor? Definition IRS Classification Tax Forms What is an Independent Contractor Agreement? What Should be Included? Sample Frequently Asked Questions (FAQ)

What is an Independent Contractor?

An independent contractor (also known as a freelancer) is a self-employed professional that offers one or more services in exchange for payment. Unlike an employee, independent contractors are free from any company-established rules and regulations, including the manner in which they do their job. In other words, freelancers are only required to deliver the services they agreed to perform – but what they do (and how they do it) is solely up to them.

The freedom provided to contractors doesn’t come without consequence, however. Insurance, worker’s comp, paid vacation, sick leave, and a stable, consistent salary are a few of the benefits freelancers give up by being self-employed. Additionally, freelancers are responsible for deducting and paying their own taxes.

Definition

“…independent contractors are entities hired by employers to accomplish certain tasks but do not have the right of control over those entities. Independent contractors tend to have specialized skills or knowledge and work for many employers.”

Source: https://www.law.cornell.edu/wex/independent_contractor

IRS Classification

The IRS designates workers as either an employee or a contractor. As established above, contractors are responsible for reporting their own income (and filing taxes). In the eyes of the IRS, a person is considered self-employed if they meet the majority of the requirements written out in three (3) categories:

• Behavioral (the contractor needs to control how and when they perform their services)
• Financial (the contractor needs to control how they’re paid, and they need to supply their own tools and equipment)
• Relationship Type (the contractor cannot be provided benefits from their employer, such as insurance)

The IRS also provides a list of professions that are viewed as independent contractors by default. These professions include accountants, auctioneers, construction contractors/subcontractors, dentists, doctors, lawyers, public stenographers, and veterinarians.

It’s important to note that a person does not need to check every single box in order to be classified as a contractor. Because the lines may be blurry between the two types, the employer will need to choose the work classification that fits best.

Tax Forms

There are two (2) major tax-related forms that are by freelancers and those that hire them. These forms are:

Form W9

Form W9 is a form that is given to a contractor (from a business) before beginning work. The freelancer will then fill out the form and provide it to the hiring business for their records. Form W9 is not filed with the IRS but is used to provide the client with detailed information on the freelancer. This allows the client to confirm who the contractor is and use the info provided in the form to later complete and file Form 1099-NEC (filed with the IRS).

Form 1099-NEC

Form 1099-NEC is a tax form used to inform the IRS of the amount a freelancer was paid in a year. A single form is completed for each contractor that was hired.

Before 2020, businesses would need to report income via the IRS form 1099-MISC. The IRS now requires Form 1099-NEC to be completed going forward instead. The form is completed by the employer, who will then need to file a copy with the IRS as well as send a copy to the contractor for their own tax reporting.

It needs to be completed if a contractor was paid $600 or more during the course of a year.

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What is an Independent Contractor Agreement?

An independent contractor agreement is a form that spells out the working relationship between a freelancer and the company hiring them. It covers all the details of how the two will work together, including the services that will be performed, how payment will be made, when the agreement will end, and more. The agreement is a necessity anytime a company is hiring a non-employee, regardless of how long the term of the contract is.

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What Should be Included?

The goal of the contract is to:

1. Provide clarity on the expectations of the client and the contractor, and
2. Protect the interests of both parties should an issue arise after work has begun.

To accomplish this, the agreement should include the following clauses:

Client + Contractor Info

Establishes the names and addresses of the contractor and the hiring entity (client). The client’s full entity name should be written (not the name of the person completing the form). Additionally, the address written should be the company’s principal office address – not the location where work will be performed (unless both are the same).

List of Service(s)

The services should be described in one (1) to two (2) sentences, providing enough information to convey the general duties of why the contractor was hired. For example, if the contractor was hired to repaint a gym’s walls, the definition could be:

“To paint all interior walls of the gymnasium (Paul’s Fitness). Includes prepping walls, mixing paint, applying necessary coat(s), overseeing subcontractors, and seeing the job through to completion.”

Payment

Establishing how the contractor will be paid (and when) is essential to forming a complete agreement. While the exact contents of the section do not matter, it should convey:

1. The amount ($) the contractor will be paid;
2. The frequency they will receive payments (e.g., lump-sum, weekly, bi-weekly, monthly, quarterly); and
3. The contingencies (if any) for receiving payment (e.g., completion of all services, delivery of an invoice).

Termination

The agreement needs to specify the situation(s) in which termination will occur. While the majority of contracts terminate upon the successful completion of all service(s), the client may want to include a termination date to ensure they have the means of ending the contract should the contractor take longer than expected.

Expenses

This section details what (if any) expenses will be paid for by an employer. Expenses refer to costs that were incurred as a result of the service(s) performed by a contractor. For example, if a contractor was hired to purchase and install a complex (and costly) generator, the contractor would most likely require reimbursement from the business for the full cost of the equipment.

Insurance

Regardless of what is written in the contract, all contractors should hold insurance to protect themselves, their employees, and the property they’re working on should an incident occur. The agreement should include a clause referencing the contractor’s commitment to hold insurance prior to beginning work. Where agreements can differ is if there is a required minimum amount the contractor must hold (such as a $1,000,000 single limit) or if they can have any limit so long it complies with the laws of the state where work is occurring.

Contractor Status

The contract should include a clause that confirms the hired contractor (and any of their employees) are deemed independent contractors per the IRS. While this doesn’t provide clients with an “out” if they’re trying to unlawfully classify an employee as a contractor, it provides the client with the contractor’s confirmation that they’re performing their services on a contracted basis and that they understand where they stand with the client.

Other Standard Clauses

In addition to the above-named clauses, the contract should contain the types of stipulations that are standard in contract law. These include:

• Assignment – Ensures the contractor can’t assign (.e.g., transfer) their duties/services to another contractor.
• Indemnification – Frees the client from any liability resulting from damage or loss caused by the service(s) provided by the freelancer.
• Severability – A boilerplate clause that ensures the contract remains valid should one of the clauses be invalid or not enforceable.
• Relationship – Like the “Contractor Status” clause, this confirms the contractor’s connection with the client. Namely, that they are not a partner, agent, employee, associate, or representative (for example) of the client.
• Signatures – The contract will need to provide space for both the contractor and the client to sign (and date) the form. This finalizes the contract, allowing work to begin officially.

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Sample

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• Download (with sample data): PDF