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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.

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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.

How can you reduce your risks as an independent contractor?

Small business insurance can reduce the financial risks of a costly lawsuit over the quality of your work.

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.

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.

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