To date, individuals across countries can only think about being employed by a business - a set schedule and paychecks getting issued at the start of every month.
But in recent times, the workforce has shifted towards a gig economy where the labor market partly comprises freelancers. There is an increasing number of self-employed individuals who provide freelance services to businesses and individuals.
So, what about them?
This guide articulates all that you need to know about an independent contractor.
Who is an Independent Contractor?
Independent Contractors or self-contractors are self-employed individuals or entities contracted to work for – or render their services to- another individual or business.
Independent contractors work as non-employees for businesses. As a result, they are to pay their taxes on their own, and businesses are not required to provide any employee benefits.
What is a 1099 Contractor?
To put it simply, a 1099 independent contractor is a non-employee who performs services for a client.
The term "1099 contractor" comes from the 1099-MISC form. Organizations should complete this form to engage with the services of a non-employee. Filling up this form is mandatory when the dues of the independent contractor exceed the amount of $599 in value.
However, not every self-employed person who provides services to businesses needs to file Form 1099-MISC. It is only applicable for business-related services. Furthermore, professions such as lawyers, doctors, and teachers are exempted from this requirement.
To further clarify what a 1099 contractor is, let’s consider an example.
If you use the services of a lawyer to resolve a dispute with your neighbor, you need not fill out the 1099-MISC form. But if you use a lawyer’s assistance to resolve a dispute with a client, you will need to carry out the 1099 paperwork—the latter being business-related work.
Difference between being an Independent Contractor and Self Employed
Independent contractor vs. Self-Employed – the difference is pretty slight.
Simply put, an independent contractor is a self-employed individual or business. It means the services rendered are on a contract basis and performed as a non-employee. For example, a freelance writer, designer, or artist working with a client on a contractual basis.
But every self-employed individual is not an independent contractor. Why?
Because all self-employed individuals do not work on a contractual basis. For example, a convenience store owner is self-employed, but the products sold in the store are not meant for a specific client.
Similarly, an individual who constructs a customized piece of furniture for a client is an independent contractor and self-employed. But someone who constructs a table for no specific client is self-employed, but not an independent contractor.
The difference between an Independent contractor vs. Employee
Independent contractors are mostly their own bosses. You get into a contract with them, take their services in return for an amount. Independent contractors are not employees. You work in collaboration for mutual benefits.
Being an employer, it is your responsibility to train, supervise, and issue their paychecks. Also, it is always the employer's responsibility to ensure that the engagement with independent contractors is secured, compliant and there are no data threats involved. Multiplier has got your back as it offers sensitive data protection, complete encryption and 100% information control. Employers can now collaborate with freelancers without worrying about data breaches.
In short, independent contracts are more like business partners. But employees are a part of your business, for whom you set work schedules and pay them their salaries as agreed-upon.
Here are the main differences between Independent Contractor vs. Employee.
How Independent Contractors Work?
Independent contractors work as partners and are not treated as employees. This essentially means that you do not have to think about their payroll taxes or employee benefits.
However, ensure that the worker qualifies as an independent contractor. The wrong categorization of workers may lead to severe consequences.
Independent contractors work for themselves. They run their own business and you act as one of their clients. So, when you are working with an independent contractor, you are essentially exchanging value.
- Independent Contractors’ Role
An independent contractor's role is to contribute to your business growth.
They set their schedule and decide the best way to get the job done. Generally, you need to provide them with reference to an outline of your requirements and the due date. The contractor determines how to accomplish it by the due date. Self contractors use their experience, skill-set, knowledge, to provide you with the best outcome.
- Independent Contractors’ Agreement
Typically, an agreement does not decide the status of an independent contractor. However, it is good to develop a written contract if you want.
For federal tax purposes, an independent contractor’s agreement should convey that the worker will not be treated as an employee. Also, terms on terminating the relationship must be mentioned clearly.
Degree of Control over the Work of Independent Contractors
Though employer and independent contractor relationships are not like the employer-employee relationship, you do have some control over the work of independent contractors.
The degree of control and independence of the contractors fall into three categories.
Behavioral control depicts the extent of control a business has over how the worker is doing the work. Under behavioral control, there are two aspects - type and degree of instructions given to the worker.
In the case of independent contractors, the business has no direct control over how the work is done. The type and degree of instructions passed on to an independent contractor are much less than employees'. Typically, the main requirements of the project are outlined maybe along with a reference to how the result should look like.
Financial control shows whether or not the business has control over the economic or income aspect of the worker’s job.
When it comes to independent contractors, they have a significant investment in the work to ensure quality. So, if the business does not pay well, there is a chance of incurring losses. Moreover, independent contractors do not receive any reimbursements.
The independent contractor typically decides the method of payment. Usually, a flat fee is paid for the work. However, in some cases, the payment is made on an hourly basis.
3. Type of relationship
The type of relationship category shows the relationship between the independent contractor and the business.
This category mainly has these three aspects in the case of independent contractors.
- Written contracts – A contract may be made between the business and the contractor stating the terms of the relationship, termination, and other specifics.
- Company benefits – Independent contractors are not entitled to employee benefits like insurance, pension. This should be mentioned in the contract too.
- Relationship Type – For independent contractors, the relationship is not for an indefinite period. It is contractual and for a specific period or project.
Important Factors to Consider for the Classification of an Independent Contractor
Here are the 4 major factors to take into consideration before classifying an independent contractor:
Independent contractors are self-employed. This means they find their clients, discuss payment terms, work agreements, and perform the necessary functions of a business.
2. Setting work schedule
Unlike employees, independent contractors set their work schedule and they are free to work whenever they want. The amount of work they do directly impacts their earning.
3. Setting salary
Independent contractors can earn as much as they like. They are free to take up several projects, provided they can do it. Plus, if they have a business, they can hire an accounting firm and write paychecks to themselves reflecting a set salary.
4. Tax payment
Independent contractors are not on payrolls and hence, they must pay their taxes. None of their clients are responsible for filing their taxes.
Misclassification Risks of Hiring Independent Contractors
Independent contractor misclassification is one of the crucial challenges in hiring independent contractors. You need to be extra careful about setting the terms of the relationship between you and the self-contractor.
Misclassifying employees as independent contractors might lead to hefty penalties, fines, and reimbursements for workers. Also, it might be considered as a way to avoid taxes as well.
To determine the worker’s status, there’s a 20 Factor Test that can be taken. Or through filing Form SS-8, the IRS can determine your worker’s status and let you know the same.
Using Multiplier, you can generate employment contractors for freelancers and full-time employees distinctly in a few clicks. The platform helps you generate contracts in 120+ languages ensuring that there is no misconception around understanding the terms of the contract.
How Do You Pay an Independent Contractor?
. Paying an independent contractor is easier compared to paying an employee. Self-contractors are not on the payroll and so, you don’t worry about paying their taxes.
Generally, self-contractors are paid on an hourly basis. However, freelancers may ask for an upfront deposit based on the project, followed by a monthly or bi-monthly payment system. It is generally best to mention the payment terms on the contract.
Do Independent Contractors Pay Taxes?
A crucial aspect for beginners is how to pay taxes as an independent contractor because self-contractors are required to pay their taxes.
They have the responsibility to pay taxes like Social Security tax and income tax, just like other businesses. However, self-contractors can lower their tax payments through deductions.
When working with 1099 contractors, do not withhold taxes. Provide IRS Form 1099-NEC to the self-contractors for them to report their income and tax returns.
Employee Benefits for Independent Contractors
Employers are generally committed to paying employee benefits like pension, insurance, providing sick leave, and paid time off. Employers are entitled by the Fair Labor Standards Act to receive the benefits.
However, employers do not offer any benefits for independent contractors. They are paid independently. The US Labor Law does not mention benefits for independent contractors as these self-contractors charge market standard fees for their services or products.
Benefits of Hiring Independent Contractors
If you are thinking about hiring 1099 contractors, here’s a list of the advantages of hiring independent contractors for your business.
Independent contractors save a lot of your money. They are not entitled to benefits. They do not require training. Plus, they pay their taxes.
Employees, on the other hand, get traditional benefits, monthly pay, and training. These cost businesses more than independent contractors.
2. Minimal to no training needed
Independent contractors are usually specialized in what they do. They have their field of expertise and hence, they do not generally require training. You can find highly skilled independent contractors to whom you can simply pass on the requirements and get the job done in time.
3. Access the global talent pool
When you are hiring an independent contractor, you get to access talent around the globe. Self-contractors do not work at company premises and they have the flexibility to work from any corner of the world. Plus, you get access to highly professional and specialized self-contractors.
For example, you want a graphic designer for your project. You can easily hire a freelancer from a different country to get the best possible results at reasonable prices.
4. Flexible staffing
Independent contractors work on a contractual basis and are usually hired for short-term projects. Here, you do not have to worry about the fluctuating workload.
For such short-term projects, hiring an employee will mean that the individual will have nothing to do when the project is done. But self-contractors can be hired for completing such jobs as they work on a contract basis.
Simplify the Hiring of Independent Contractors with Multiplier
Are you worried about hiring skilled and reliable independent contractors? Well, we don’t blame you. The process is indeed risky and involves quite a lot of challenges. Some of these include:
- Staying compliant while creating contracts
- Paying contractors and freelancers from different parts of the world
- Offering perks and benefits to the contractors
So what is the way out? Well, businesses should get an outsourcing platform that takes care of all global contractor issues. That way it will be easier for entrepreneurs to focus on more meaningful activities. One SaaS platform that can help you here is Multiplier.
- It can effectively generate compliant contracts to hire freelancers
- It simplifies the payment of global contractors with just a simple click
- It helps you provide the necessary perks and benefits to the freelancers
Want to know more? Book a demo now!