An independent contractor agreement is a formal contract between a business and a self-employed individual, used to define the scope, terms, and conditions of a project-based or service-based engagement. It is often referred to as a 1099 or freelance contract.
Suppose you’re planning to hire an independent contractor anytime soon. In that case, it’s time that you understand the basics of an independent contractor agreement and how it works. In this article, we’ll share all those details.
So, let’s begin.
What is an independent contractor agreement?
An independent contractor agreement is a contract or document that employers use to hire a freelancer or consultant. This contract differentiates between an independent contractor and an employee. To better understand how the IRS defines independent contractors, you can refer to their official guidance here.
An independent contractor agreement can include:
- Specific job responsibilities of the freelancer
- The services they are providing
- The work tenure
- The mode of payment
Like a typical employment contract, an independent contractor agreement includes specific clauses like non-solicitation agreements, non-disclosure agreements, and non-compete agreements.
There is also a written clause in the agreement that is unique for freelancers only. It is the copyright owner of any deliverables produced by the independent contractor. Additionally, an independent contractor also includes the resolution methods to address any legal disputes between the contractor and the employer.
What are the other names for an independent contractor agreement?
You can use an independent contractor agreement for different purposes. In that case, you’ll have to address it with other names:
- Electrical contractor agreement
- Painting contractor agreement
- Freelance creative agreement
- Building contractor agreement
- Home contractor agreement
And the list goes on. Based on the responsibilities of the independent contractor, the name of the agreement can change.
What are the differences between an independent contractor and an employee?
Have you ever wondered, “Should I hire a full-time employee or a freelancer?”. Well, this is a very common and valid question. As an employer, it is your responsibility to make an optimal decision. You should be able to figure out by yourself whether an independent contractor or a full-time employee will be the perfect fit for your company.
Here are some fundamental differences between independent contractors and employees that employers should know:
- When hiring full-time employees, employers are required to withhold taxes such as social security and medicare. In contrast, independent contractors handle these tax obligations themselves, relieving the employer of that responsibility.
- For full-time employees, employers need to fill out a W-2 form for each employee. Alternatively, for freelancers or independent contractors, you need to produce a W9 form. However, there’s a catch. The independent contractor will fill out the W9 form.
- To hire an independent contractor, employers need to file information returns through a 1099-MISC form. This is valid for any payments higher than $600. For employees, there are no such requirements.
How do you make an independent contractor agreement?
Are you struggling with creating an independent contractor agreement template? Well, it’s not tricky at all.
Follow these three easy steps to create your first independent contractor agreement:
- Answer a few common questions like the independent contractor’s name, contact information, responsibilities, payment amount and frequency, payment mode, and term of the contract. Consolidate all this information in one place.
- Once the agreement is ready, share it with your legal practitioner. Get valid feedback and share the document with the freelancer afterwards.
- Ensure that both parties agree with the terms mentioned in the agreement. Also, get it signed by the independent contractor, sign it yourself, and keep a copy for any future inconvenience.
9 Mandatory factors in an independent contractor agreement
An ideal independent contractor agreement should address the following factors:
1. Scope of work
The easiest part of the independent contractor agreement is writing out the scope of the work. All you need to do is outline what the independent contractor needs to deliver in exchange for the payment.
Ensure that you specify the deliverables, regardless of the type of work that needs to be done. For instance, the contractor will deliver a 1000 characters promotional ad for XYZ Ltd. in the form of a downloadable attachment in .png format.
In case your project is complex, like real estate projects, you can break down the deliverables into smaller goals or milestones.
2. Timeframe
As you present the deliverables, provide the timeframe for its completion as well.
In an independent contractor agreement, you must mention the timeline for the work and the expected delivery date for the work. Plus, if you have any key milestones along with the completion of the work, mention the deadlines for each.
If your project needs approval from stakeholders, consider it before setting the timeline.
For instance, your ad campaign needs to be approved by the Marketing Director before the final submission. In this case, make sure you set a window for review and edits before paying your contractor.
3. Payment terms
How will you pay the contractor, and when?
The employer must specify the payment terms in the independent contractor agreement after a mutual discussion.
Generally, payment terms include net 30. This means that the payment will be made within 30 days of submitting the invoice. Besides, you might also consider end-of-the-month invoicing, wherein the contractor will submit the invoice at the end of every month.
Several contractors also prefer bi-monthly payments to maintain steady cash flow. For more complex projects, it’s common for contractors to request an upfront deposit, with the remaining amount paid upon completion.
Additionally, it’s important to clearly outline expense responsibilities, such as who will bear costs related to travel, raw materials, or equipment, to avoid confusion later.
4. Confidentiality
In an independent contractor agreement, the confidentiality section specifies the dos and don’ts related to sensitive information and trade secrets.
What are the guidelines to be followed for such information?
This section mentions that the contractor should not use or download any confidential information encountered during the project for personal gains. Such information must be used only for work purposes with utmost security measures.
5. Termination grounds
This clause specifies when and how either party may terminate the agreement. It typically includes the reasons for termination, the required notice period, and the method of delivering such notice.
For example: “Both XYZ Ltd. and the contractor retain the right to terminate this agreement at any point, for any reason, by providing the other party with written notice at least five days in advance.”
This ensures transparency and allows both parties to exit the arrangement with minimal disruption.
6. Clear relationship classification and tax responsibilities
Clarify that the contractor is not an employee and, therefore, not entitled to benefits like health insurance, paid leave, or retirement plans. The contractor is fully responsible for their own taxes, including income and self-employment taxes.
They may be required to submit a completed IRS Form W-9 before starting work. This classification helps protect your business from misclassification penalties and tax-related liabilities.
7. Dispute resolution process
Include a clause outlining how any disputes will be resolved. This might involve a requirement to pursue mediation or arbitration before legal action. Also, specify which state’s laws will govern the agreement.
A clearly defined dispute resolution clause ensures that conflicts can be addressed fairly and efficiently, reducing the risk of prolonged legal battles.
8. Non-solicitation clause
There may be cases where a contractor builds strong relationships with your clients or internal teams. To prevent them from leveraging these relationships for personal gain, consider adding a non-solicitation clause.
This clause prevents the contractor from directly approaching your clients or recruiting your employees for a defined period (typically 12–24 months) after the contract ends. This protects your company’s relationships and intellectual investments, especially in service-based or client-facing roles.
9. Agreement duration and renewal terms
Independent contractor agreements should state whether the contract is valid for a single project, a set period (e.g., 6 or 12 months), or on an ongoing basis.
If the agreement is renewable, outline the terms for renewal, whether it happens automatically, requires mutual consent, or must be renegotiated. For long-term engagements, consider adding a clause that encourages periodic review of the contract to ensure that the scope, rate, and terms still align with the current needs of both parties.
3 reasons why a business owner needs an independent contractor agreement
If you are still in doubt as to whether you need an independent contractor agreement or not, here’s why you do need it.
1. Outlining clear expectations
An independent contractor agreement sets out the expectations of the work, its parameters, deliverables, compensation, and the nature of the relationship.
The contract clearly explains how the work will be done, the communication flow, and how the relationship between the company and the contractor will work out.
2. Ownership of the Work
An independent contractor agreement;
- Establishes the ownership of the work product generated from the client-contractor arrangement
- Ensures that contractors protect trade secrets
- Provides for non-disclosure and confidentiality of key and sensitive business information
This ensures protecting your business interest as an employer.
3. Specifying the client-contractor relationship
The responsibilities of employers are different for employees and independent contractors. An independent contractor agreement affirms these responsibilities and clearly defines the relationship in writing.
For instance, unlike employees, independent contractors pay their own income taxes and are not entitled to benefits like insurance and paid leave.
An independent contractor agreement ensures you are protected from any claims by a contractor seeking employee status or benefits.
Are there any IRS obligations in hiring an independent contractor?
When hiring an independent contractor, you might have certain IRS obligations.
If you hire a self-employed individual, you will have to fill out Form W-9 and 1099-MISC. Both forms are easily downloadable from the IRS website.
The W-9 form collects their contact information and tax identification number. The 1099-MISC form shows how they report income for income tax returns. If you pay more than $600 annually, you will have to fill out the 1099-MISC form. To satisfy further IRS obligations, these forms must be submitted before 31st January of the following year.
Make sure to keep a record of the contractor as proof that the individual is not an employee but an independent contractor. Keep a list of the contractor’s qualifications, invoices, and payment proofs, and be audit-ready.
How can you protect confidential information while working with a freelancer?
For a fruitful experience with freelancers, you need to have mutual trust. But it is also important to protect confidential business information.
Here are a few tips that would help you protect your trade secrets while working in collaboration with contractors.
1. Get to know the contractor first
Trust is the foundation of collaboration. So, to build trust in your freelancer, make sure you know them well.
Verify their authenticity by visiting their official page, LinkedIn profiles. Check for client ratings, reviews, list of published work, licenses and certifications.
After you have checked out the credentials, conduct a short interview with the freelancer before making a hire.
2. Keep the privacy of your project intact
Keeping the project private restricts visibility to only those freelancers you specifically invite. They are the only ones who can access the details.
On the other hand, if the project is public, any freelancer can find and view it through Google search results.
To maintain confidentiality, it is generally recommended to keep your project private and share it only with selected freelancers. However, the decision is yours, based on how you wish to manage the project’s privacy and visibility settings.
3. Get an understanding of the terms and conditions
Pay attention to the terms and conditions involved in the collaboration.
Is the IP and confidentiality protection specified? Is the ownership of the work product mentioned?
Make sure you have it all when discussing the terms and conditions of the work with the freelancer. For example, you can include that.
- You reserve all rights to the intellectual property
- You grant the freelancer the right to use the materials and business-related information solely for work purposes
- On the completion of the project, all the remaining resources will be returned to you, and copies of the work (if any) will be securely destroyed.
You might choose to add customizations to these terms and conditions as per the nature of your work.
Are non-compete agreements enforceable for independent contractors?
Non-compete agreements can be enforceable for independent contractors, but their validity often depends on how they are drafted and the laws of the region where the contractor operates.
Courts typically scrutinize such clauses more strictly for contractors than for employees, ensuring they are reasonable in scope, duration, and geography.
If a non-compete unfairly restricts a contractor’s ability to earn a living or lacks a legitimate business interest, it may not hold up legally.
To improve enforceability, ensure your non-compete clause is clearly defined, tailored to the contractor’s role, and justified by a genuine business need, such as protecting trade secrets or client relationships.
Always consult legal counsel to make sure your non-compete terms comply with local regulations and won’t backfire.
Key considerations:
- The clause must protect a legitimate business interest (e.g., intellectual property, client data).
- Duration and geographic scope must be reasonable and justifiable.
- It should not impose blanket restrictions that hinder the contractor’s right to work elsewhere.
- Must align with local labor laws, which vary by region or country.
- The agreement should be part of a larger, well-drafted independent contractor contract.
Create multi-lingual employment contracts with Multiplier
Hiring an independent contractor and managing the associated agreements doesn’t have to be stressful.
If you are unsure about how to create a valid and compliant independent contractor agreement, Multiplier is here to help. Our SaaS-based employment solution simplifies every step of the process:
- Hiring an independent contractor becomes effortless with Multiplier’s ability to generate legally compliant, region-specific contracts. All key terms and conditions are clearly captured to protect both parties.
- Paying global contractors is made easy through a unified system that ensures freelancers across multiple countries get paid accurately and on time.
- You can also offer added value by providing benefits like health insurance and other perks to your independent contractors through the Multiplier platform.
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