Independent Contractor
What is an Independent Contractor?
An independent contractor is a self-employed individual, business, or corporation that provides services to another individual or business under the terms laid out in a contract. They are not considered employees, as they work only when required.
The Difference Between Independent Contractors and Employees
The differences between an independent contractor and an employee are varied but vital, particularly legally. According to the IRS, “you are not an independent contractor if you perform services that can be controlled by an employer.”
For example, a company might pay a contractor and an employee for the same or similar work, but if the employer has the “legal right to control the details of how the services are performed,” then an employer-employee relationship exists.
Additionally, companies are required to withhold taxes, Social Security, and Medicare for wages paid to employees but not contractors. Likewise, employment and labor laws do not apply to independent contractors.
Taxes and Independent Contractors
As previously stated, the IRS considers independent contractors to be self-employed, which impacts both the employer and the contractor.
For employers, this means that you are not required to deduct taxes from independent contractor wages, including Social Security and Medicare. For independent contractors, this means that you’re required to pay a Self-Employment Tax, which is 15.3%, and includes allotments for Social Security (12.4%) and Medicare (2.9%).
Why Work with Independent Contractors?
One of the main benefits of working with independent contractors is that they don’t require the same expenses that go into hiring, onboarding, and retaining an employee.
In some cases, companies may hire these workers to provide a perspective outside of the expertise on their team. For example, a freelance writer may specialize in composing stories about fashion trends. If you’re in need of content specific to this topic, you may request the writer’s services for an agreed-upon fee.
In other cases, a firm may need to consult an expert for a fixed project, such as hiring an accountant to reshape its budget and finances.
Related Terms: Employee