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Independent contractor
An independent contractor is self-employed and provides services to other businesses and the general public. Some independent contractors prefer the title of freelancer, which is often used by those in creative fields.
What is an independent contractor?
An independent contractor can be self-employed in any number of professions, offering their services to other businesses or individuals as a nonemployee. They're usually responsible for their own payroll taxes, including Social Security taxes and Medicare taxes.
They typically don't receive employee benefits from those they work for, such as health insurance, and pay their own costs of healthcare. Their independent contractor status means the services they provide are their own business to manage, giving them a degree of control unlike those of regular employees.
Independent contractors are hired on a part-time or short-term basis. They may have several clients at once, doing work for each of them as needed. They might perform steady work for one client at a time, usually until a project or series of projects are completed.
For example, an architect or engineer might get paid at an hourly rate to work for a specified number of hours per week, or they might provide their services on a per-project basis under a written contract.
Many independent contractors set their own schedule and rates by the hour or per project. Some also have a regular, full-time job and perform contract work as a side hustle for the additional income.
Independent contractors may work remotely, especially in today's gig economy, although some have to work onsite.
Get the right independent contractor business insurance
View video transcript.
[video: an animated header displays the Insureon logo. Underneath it, a subheading displays the text: "What insurance coverage do independent contractors need?"]
MALE VOICEOVER: As an independent contractor, there are many perks you can enjoy like work flexibility and tax deductions. However, you aren't free from the risks larger businesses often face. With business insurance, you can safeguard your personal assets and your business from costly repairs, legal fees, and medical expenses. There are several insurance policies that provide sustained peace of mind and protect your business. Let's take a closer look at some top policies.
[video: an illustrated header displays the text: "General liability covers:"]
[video: Under above header, three bullet points display the text: "Slip-and-fall accidents"; "Client property damage"; "Product liability lawsuits"]
General liability insurance covers third-party accidents, such as customer injuries or property damage.
[video: an illustrated header displays the text: "Professional liability covers:"]
[video: Under above header, three bullet points display the text: "Accusations of negligence"; "Missed deadlines"; "Errors that cost clients clients money"]
Professional liability insurance, sometimes called errors and omissions coverage, will protect your business from lawsuits related to work mistakes and oversights.
[video: an illustrated header displays the text: "Workers' comp covers:"]
[video: Under above header, three bullet points display the text: "Work-related medical expenses"; "Disability benefits"; "Lawsuits from employee injuries"]
Workers' compensation insurance is required in most states and can shield you from work-related medical costs.
[video: an illustrated header displays the text: "Cyber insurance covers:"]
[video: Under above header, three bullet points display the text: "Data breach notification costs"; "Data breach investigations"; "PR costs for reputational harm"]
Cyber insurance can help your business financially recover from data breaches and cyber attacks.
[video: an illustrated header displays the text: "Commercial property covers:"]
[video: Under above header, three bullet points display the text: "Fires"; "Storm damage"; "Equipment theft"]
Commercial property insurance covers costs if your business property is damaged, destroyed, or stolen.
[video: an illustrated header displays the text: "A BOP covers:"]
[video: Under above header, three bullet points display the text: "Client accidents"; "Stolen or damaged property"; "Business interruptions"]
A business owner's policy or BOP bundles general liability and commercial property coverage together, and is usually less expensive than buying each of these policies individually.
[video: an illustrated header displays the text: "Commercial auto covers:"]
[video: Under above header, three bullet points display the text: "Auto accident injuries"; "Property damage caused by vehicles"; "Vehicle theft and vandalism"]
Commercial auto insurance protects your business from costs related to an auto accident involving your company vehicle.
[video: an illustrated header displays the text: "Fidelity bonds cover:"]
[video: Under above header, three bullet points display the text: "Employee theft or fraud"; "Illegal funds transfer by an employee"; "Client contract requirements"]
Fidelity bonds provide reimbursement to your client if an employee steals from them. These bonds are also sometimes required in contracts.
[video: an illustrated header displays the text: "Why is contractor insurance important?"]
So, why is it important for you to have insurance as an independent contractor?
[video: an illustrated header displays the text: "Contractors may need insurance to:"]
[video: Under above header, three bullet points display the text: "Sign a contract or lease"; "Apply for a loan"; "Comply with federal or state laws"]
You may need coverage to sign a contract or lease. You also might need insurance to comply with federal, state, or local laws.
[video: an illustrated header displays the text: "Insurance can also help:"]
[video: Under above header, three bullet points display the text: "During business closures"; "Gain client trust"; "Attract talent"]
Insurance also protects you from catastrophic losses that could stop your services. Plus, the right coverage can help you gain a client's trust.
Get the best coverage for your business with Insureon today.
[video: an illustrated white header displays the text: "Insureon is your #1 agency for small business insurance"]
Click the link to get started.
[video: an animated header displays the Insureon logo]
What are the tax requirements for independent contractors?
As both a business owner and taxpayer, independent contractors typically pay self-employment taxes on their own and are responsible for reporting this to the Internal Revenue Service in their tax returns. They often keep track of their own business expenses, for any allowable tax deductions to their business taxes, and are responsible for managing their own tax withholdings and tax liability.
Some independent contractors may receive a 1099 form that indicates the income they received from a client, as part of their independent contractor agreement with the customer. Because of their employment status and independent contractor relationship with clients, the IRS regards them as self-employed individuals.
They’re unlikely to pay unemployment taxes and are therefore ineligible for unemployment insurance, apart from the kind of emergency relief that was provided during the coronavirus pandemic.
How do independent contractors differ from employees?
Someone is considered an independent contractor if their client controls the direct result of the work, but not how it’s performed. An employee has a supervisor directing their work and how it’s performed.
You’re not an independent contractor if your employer controls what you do and how it’s done. This applies even if you’re given freedom of action in how you perform your duties. However, the employer has the legal right to control the details of how your services are performed.
An attorney would be considered an employee if they’re hired by a firm to serve its clients, attend regular meetings, has a supervisor overseeing the work, and the firm is responsible for billing clients, paying the attorney, withholding income tax, and maintaining the office.
The attorney would be considered a contractor if they have their own office, oversee their own work, and are responsible for billing clients, maintaining their own office, and paying their own FICA taxes.
What are the advantages of being a contractor?
Being an independent contractor allows someone to be their own boss and to choose which projects they work on, the amount of money they're willing to accept, and where and how the work is performed.
What are the disadvantages of being an independent contractor?
As a business owner you could be subject to lawsuits over injuries, property damage, or financial damage related to your work. If you were an employee, your employer would likely face this litigation instead.
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How can you reduce your risks as an independent contractor?
Independent Contractor Business Insurance can reduce the financial risks of a costly lawsuit over the quality of your work. Independent contractors and small business owners can help mitigate risks with some of the following policies:
- General liability insurance protects you from lawsuits over third-party injuries or property damage. If you damage someone's property while working at their home office, they could sue you for the cost of repairs.
- Professional liability insurance, also called errors and omissions insurance (E&O), protects you from lawsuits over accusations of missed deadlines, budget overruns, or poor-quality work.
- Commercial property insurance or a business owner's policy (BOP) to protect against business property damage or theft
- Commercial auto insurance to meet state insurance requirements for business-owned vehicles
- Hired and non-owned auto insurance (HNOA) if they drive their own vehicle for work purposes
- Workers' compensation insurance, while not typically required for independent contractors, can pay your medical bills and lost wages if you're injured on the job.
Independent contractors can also deduct the cost of business insurance from their taxes. Not sure which types of insurance you might need? Chat with a licensed insurance agent to learn more and select the right coverage. You can even get a certificate of insurance the same day.
Updated: February 2, 2024
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