Definition
An independent contractor is an individual or business entity that provides goods or services to another entity under terms specified in a contract or within a verbal agreement, different from an employee who works under an employer’s supervision and control. Unlike employees, independent contractors are self-employed and usually have the freedom to determine how and when work is completed. They are responsible for paying their own income taxes, social security, Medicare, and other employment taxes.
Examples
- Freelance writer: A writer who takes assignments from various clients but controls when, where, and how the writing tasks are completed.
- Consultant: A business consultant who provides expert advice to companies on a contractual basis but isn’t bound by the company’s internal workplace rules.
- Contractor: A construction worker who works on multiple projects independently instead of being employed by one construction firm.
- Graphic Designer: A designer who works on design projects for various clients without being a permanent employee of any single company.
Frequently Asked Questions
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What distinguishes an independent contractor from an employee?
- Unlike employees, independent contractors have more control over the way they work, bear the risk of profit or loss, and are not entitled to employee benefits provided by employers. They are responsible for their own taxes and do not have employment contracts.
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What taxes does an independent contractor have to pay?
- Independent contractors must pay self-employment tax, which includes Social Security and Medicare taxes. They also need to pay estimated taxes quarterly.
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Do independent contractors receive benefits from clients?
- Typically, no. Independent contractors are responsible for their own benefits such as health insurance, retirement plans, and other perks.
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Is an independent contractor entitled to minimum wage or overtime pay?
- No. Wage and hour laws, including minimum wage and overtime pay, generally do not apply to independent contractors.
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How does one determine if they are an independent contractor or an employee?
- The determination involves factors such as the degree of control the company has over the work process, method of payment, whether the individual provides their own tools and equipment, and if the relationship is ongoing or project-specific.
Related Terms
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Freelancer: Similar to an independent contractor, a freelancer is a self-employed person who offers services to multiple clients typically over a short-term or project basis.
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Self-employment Tax: The total of Social Security and Medicare taxes for individuals who work for themselves.
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1099-MISC: A form used in the United States to report income paid to independent contractors.
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W-9 Form: A form used in the United States by independent contractors to provide their Taxpayer Identification Number to the hiring entity.
Online References
- IRS - Self-Employed Individuals Tax Center
- Freelancers Union
- U.S. Small Business Administration (SBA) - Independent Contractors
Suggested Books for Further Studies
- “Independent Contractor, Sole Proprietor, and LLC Taxes” by Gregory S. Addison – A comprehensive guide on taxes specific to independent contractors.
- “The Freelancer’s Bible: Everything You Need to Know to Have the Career of Your Dreams—On Your Terms” by Sara Horowitz – An essential handbook for freelancers and independent contractors.
- “The Complete Guide to Affiliate Marketing on the Web: How to Use It and Profit from It” by Bruce C. Brown – Relevant for independent contractors working in digital marketing fields.
Fundamentals of Independent Contractors: Business Law Basics Quiz
### What does an independent contractor have to pay instead of the employer’s social security taxes?
- [ ] Regular taxes only
- [ ] Only state taxes
- [ ] No taxes
- [x] Self-employment tax
> **Explanation:** Unlike regular employees, independent contractors are responsible for their own self-employment taxes, which cover both Social Security and Medicare taxes.
### Can an independent contractor decide where and when to work?
- [x] Yes, they control their work schedule.
- [ ] No, they follow the client's work schedule.
- [ ] They can decide where but not when.
- [ ] It depends on the project terms.
> **Explanation:** Independent contractors have the freedom to determine how, where, and when they work, provided they deliver the agreed outcome within the deadlines specified.
### Is an independent contractor entitled to employee benefits like health insurance?
- [ ] Yes, always
- [x] No, they aren't eligible for employee benefits.
- [ ] Only in long-term contracts
- [ ] It depends on the client's policies.
> **Explanation:** Independent contractors are self-employed and therefore do not receive employee benefits such as health insurance, retirement plans, etc.
### What form is used to report payments to an independent contractor in the United States?
- [ ] W-2
- [x] 1099-MISC
- [ ] W-4
- [ ] 1040
> **Explanation:** Independent contractors' income is reported using the 1099-MISC form instead of the W-2 form used for employees.
### Which of the following is NOT typically a characteristic of an independent contractor?
- [ ] Controls their own hours
- [x] Receives regular employee benefits
- [ ] Bears the risk of profit or loss
- [ ] Has multiple clients
> **Explanation:** Independent contractors do not receive regular employee benefits, which is a significant distinction from employees.
### What type of form should independent contractors in the US complete to provide their Taxpayer Identification Number to clients?
- [ ] W-2
- [ ] 1040EZ
- [x] W-9
- [ ] SS-5
> **Explanation:** Independent contractors use the W-9 form to provide their Taxpayer Identification Number to clients.
### How often are independent contractors in the US typically required to pay estimated taxes?
- [x] Quarterly
- [ ] Annually
- [ ] Monthly
- [ ] Weekly
> **Explanation:** Independent contractors are generally required to make estimated tax payments on a quarterly basis.
### Which government agency provides guidelines for determining independent contractor status in the US?
- [ ] Department of Labor
- [ ] Securities and Exchange Commission
- [x] Internal Revenue Service (IRS)
- [ ] Social Security Administration
> **Explanation:** The IRS provides guidelines and regulations for determining whether an individual is an independent contractor or an employee.
### What main factor distinguishes an independent contractor from an employee in the US?
- [ ] Length of work
- [ ] Payment method
- [x] Degree of control over work process
- [ ] Type of work
> **Explanation:** The principal factor is the degree of control over how and when the work is done. Independent contractors have significant autonomy compared to employees.
### Are independent contractors responsible for their own business expenses?
- [x] Yes, they cover their own expenses.
- [ ] No, the client always covers them.
- [ ] It depends on the contract.
- [ ] Only for expenses over a certain amount.
> **Explanation:** Independent contractors are typically responsible for all business expenses associated with providing their services.
Thank you for exploring the concept of independent contractors. Continue expanding your professional knowledge!
