Independent Contractor Contracts: Everything You Need to Know
Independent contractor contracts are legal agreements between a worker and the business or company they work for but are not legally employed by. 3 min read
2. What Is an Independent Contractor Agreement?
3. Difference Between Contractors and Employees
Updated October 30, 2020:
Independent contractor contracts are legal agreements between a worker and the business or company they work for but are not legally employed by.
What Is an Independent Contractor?
An independent contractor is a worker who is not legally considered an employee of any company. Independent contractors are also called freelancers or consultants and are usually self-employed, providing products or services to clients and businesses for payment.
A company (or client) that hires an independent contractor isn't responsible for paying that worker's employment taxes (Social Security and Medicare), nor do they need to withhold any taxes from the worker's paycheck. Independent contractors must pay their own self-employment and income taxes on what they earn each year. Any client that pays an independent contractor $600 or over per year must notify the IRS.
Companies are not bound to the legal requirements in their professional relationships with independent contractors like they are with employees. For instance, they are not required to provide any sick pay, maternity leave, or other similar benefits.
What Is an Independent Contractor Agreement?
Independent contractor agreements are contracts that outline the agreement between a freelancer and their client or customer. They should include:
- Details about the services or products purchased
- The terms and duration of said service
- How the independent contractor will be paid
- A confidentiality clause
- A non-solicitation clause
- A dispute resolution clause
Usually, independent contractors are hired for projects with a defined term length. Independent contractor contracts will explain why the company is not hiring the contractor as a legal employee.
Other names for independent contractor contracts are:
- Freelance contracts
- Consultant agreements
- General contractor agreements
- Subcontractor agreements
- Consulting services agreements
If a worker is doing work on an as-needed basis for a company as a freelancer, they'll want to use an independent contractor agreement. Companies using freelancers for work will also benefit from these types of contracts. Employee contracts should always be used for legal employees.
Difference Between Contractors and Employees
There are some big legal and logistic differences between independent contractors and employees. Independent contractor agreements should only be used for people working as contractors.
Unlike most employees, independent contractors can:
- Work for more than one company
- Send invoices to their clients
- Have an investment in their own business as a contractor and therefore take in profits and losses
- Sign independent contractor agreements
- Work from contract to contract
- Hire their own employees or contractors to help them with projects
- Control where they work
- Control exactly how work is completed as long as they produce the desired outcome
Independent contractors can be useful in many situations. People might hire a freelance worker to help remodel their house, handle home repairs, or take care of their pets or lawn. Some businesses use freelancers for writing projects, software coding, general web design or creating a webpage, and other needs for company projects. Independent contractors can also be very helpful when planning a big event. Many catering, photography, videography, and floral services are offered by independent contractors.
Anyone hiring an independent contractor should keep in mind that they can make their visions for a final product clear, but the freelance worker tends to have a large amount of control over how it's done.
Employees are treated differently than independent contractors and they usually:
- Are given employee benefits, like vacation time, maternity/paternity leave, sick pay, etc.
- Have their wages totally controlled by their employer
- Are managed by the employer in how they complete their work and where
- Sign an employment contract
- Have annual reviews regarding their work
- Get job training from the employer
- Work under a job description determined by their employer
- Have less autonomy that an independent contractor
Employees should always sign employment offers and contracts (or agreements). Employee contracts should be straightforward and include information on the employee's job responsibilities, length of the probationary period (if applicable), and the salary or pay.
All workers for a company should sign contracts, even if the business uses both employees and contractors, to be sure of proper taxation and that everyone is following the employment laws in place. Employers will want to keep their employees and contractors separate since they need to pay taxes on their employees, but not their contractors.
If you need help with independent contractor contracts, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.