Are you planning to hire independent contractors for your business?
Then, perhaps you must be looking for sources that would tell you about independent contractors vs. self-employed individuals.
It is essential to understand an independent contractor or a self-employed individual because of the implications of taxes and insurances.
So, before you can finalize hiring independent contractors, let’s clear out all confusion surrounding self-employed vs. contractor.
Let’s get going!
By definition, an independent contractor is an individual who renders services to another entity – individual or company, as a non-employee.
As the name suggests, independent contractors are individuals who enjoy a great deal of liberty in their work, unlike employees.
As per the US labor law, three significant categories help you differentiate between employees and independent contractors. Here they are:
Is an independent contractor self-employed?
Well, you might say so. Because, like self-employed individuals, you cannot control every aspect of an independent contractor. They work as non-employees and, hence, the degree of control is lesser in the case of independent contractors than employees.
Independent contractors determine their working hours, location, equipment, tools, schedule, means of work, work process, etc. You are supposed to provide your requirements and the project due date. The contractor determines the rest. They control how and when they will begin working on completing it on time.
Independent contractors provide services as non-employees. They are the only ones in charge of the business aspect of their work.
We mean that the difference between self-employed and independent contractors is not much when it comes to their working style.
These individuals decide on their own where and how they will invest their business income. They might use it for training, education, or even in tools and equipment.
As an employer, you must know the type of relationship independent contractors generally share with businesses.
Independent contractors are typically hired for a definite period of time to perform a project. For instance, you might hire a graphics designer who is an independent contractor to make your social media campaign better.
This is a one-time engagement for a specific period, unlike employees who commit to a long-term relationship with a company.
Are employees different from independent contractors?
Are independent contractors self-employed?
You should answer these questions before you plan to hire independent contractors in the business and employees.
Because the legal status of a worker will determine how you go about their taxation, it will not only influence the tax deductions.
Along with this, knowing the legal status of the worker will help you determine;
− the employer-worker relationship,
− the need for a contract,
− extent of control, etc.
Plus, knowing the legal status of a worker will also prevent misclassification that might even lead to penalties for the business (if detected while auditing).
Before we can get into the main differences between contractor and self-employed, let us give you a clear explanation of whether an individual is self-employed or an independent contractor.
Simply put, being an independent contractor is a way of being self-employed.
Is an independent contractor self-employed?
Yes. Independent contractors are self-employed who earn an income but do not work as employees. For example, the owner of a convenience store is self-employed and is a freelance graphic designer.
But, is self-employed the same as independent contractors?
No. The difference between self-employed and independent contractors lies here. While an independent contractor is the same as a self-employed, a self-employed person might not be an independent contractor.
Here’s an example:
You hire a freelance artist for crafting a customized painting for your new office. This artist is an independent contractor making a painting for you (the client). But if an artist crafts different paintings for display in galleries without any specific client in mind, then the artist is not an independent contractor. However, in both cases, they are self-employed.
So, summarizing the explanation – an independent contractor is self-employed. But a self-employed individual is not necessarily an independent contractor.
We hope we could give you a clear picture of the difference between an independent contractor and a self-employed individual.
However, here are a few important categories that further clarify if self-employed the same as an independent contractor.
Both independent contractors and self-employed people run their business entity as a sole proprietorship when it comes to business structure. In other words, by default, their business structure is the sole proprietorship.
However, self-employed people can form other business structures like partnerships, limited liability companies, corporations, etc. On the other hand, independent contractors primarily work on a contractual basis.
A self-employed independent contractor's taxes need to be paid by the independent contractor, unlike employees.
For employees, filing and paying taxes is pretty easy as their employers automatically deduct the taxes in each pay cycle. But, taxes for self-employed or independent contractors should be paid on their own.
In the case of taxes and deductions, is an independent contractor the same as a self-employed?
Yes. Any self-employed person, including an independent contractor, must pay the Social Security and Medicare taxes, insurance, and income tax on their own.
You must provide independent contractors with a 1099-MISC form showing the total payment you made to the individual.
So, when paying taxes, is 1099 considered self-employed?
To make it short and Precise, here’s a summary of the taxes for self-employed people (including independent contractors):
For taxation purposes, the IRS considers independent contractors as self-employed people. So, the tax deductions are the same for independent contractors and self-employed individuals.
There are several tax deductions for self-employed people that reduce their self-employment taxes. They need to claim these tax deductions as they are available for business expenses.
Here are a few examples:
For self-employed individuals (including independent contractors), insurance is a must. However, not all insurances are the same for all self-employed people. It depends on the specific business as to what insurances they will be applying for.
For instance, for freelance graphic designers, insurance for their laptops will be their priority, though it might not be critical. On the other hand, insurance for independent contractors would be crucial for self-employed people who work on-sites.
Also, if a self-employed person has a team, workers’ compensation insurance will probably be mandatory.
There are other insurance types like professional liability, general liability insurance, commercial auto insurance, etc., that might be fit for self-employed individuals.
However, business insurance for independent contractors mostly includes one of the following:
The rules of licensing requirements vary from one state to another. Plus, it depends a lot on the type of work that the self-employed individuals (including independent contractors) are performing.
For instance, food services, broadcasting, beauty services, construction, electrical work, plumbing, retail of controlled substances, etc. require a license.
On the other hand, consulting, writing, web development, app development, making and selling handicrafts, graphic designing, etc. does not require licensing.
The rules of licensing are not affected by the employment status of a worker. It remains the same in the case of an independent contractor, freelancer, sole proprietor, self-employed worker, and so on.
A few questions related to self-employed people and independent contractors do come to mind as a little confusing. For example,
Is an independent contractor the same as a self-employed?
Or, are independent contractors self-employed?
Such questions are important to address to get hold of the concept of an independent contractor vs self-employed.
So, addressing all your doubts, here is the concluding explanation to is an independent contractor self-employed.
Independent contractors are self-employed. However, not all self-employed people are independent contractors. Consider the examples below:
The main difference between these two examples is that the graphic designer is the boss in the first case but has contractual relationships with different brands.
But in example 2, the fashion designer is the owner of a small business, not in a contractual relationship with any other business entity.
FYI, it is also possible that an independent contractor (a self-employed person) is also an employee. Think of the IT manager of a company that also provides web development services to local businesses. In this case, the manager is both an employee and an independent contractor.
Do you know how to hire an independent contractor? Can you distinguish between an independent contractor and a self-employed person? Running a business involves all these aspects. If you can’t manage all of these on your own, it’s better to get a tool that can help you out.
We’re talking about an efficient, onboarding SaaS platform called Multiplier.
It can streamline your independent contractor hiring process with the following assistance:
Want to explore further? Book a demo now!