What is an Independent Contractor
An independent contractor is someone who provides a service to another company. They have the privileges of working for themselves like creating their own terms and hours, but they still work with businesses to provide services based on a contractual agreement. Independent contractors are not on the company’s structured payroll.
The Seven key indicators that qualify Independent Contractors:
They Are Self-employed
An independent contractor is self-employed. They don’t work for another business or are on that business’s payroll. It is one form of self-employment involving a contractual agreement for a service to be provided.
They Set Their Own Schedule
Typical 9 to 5 work hours Monday through Friday don’t apply to an independent contractor. They have the ability to work when they want. Some days they can work three hours, and others they may work for much longer. It depends on the project and how the individual wants to structure their work.
They Have Their Own Tools
Businesses do not provide the equipment necessary to complete the work. Unlike typical office settings that provide computers, phones, chairs, etc. an independent contractor must bring their own tools. The business will not provide the hammers and nails to complete the job. The cost of these items are factored into the contract and agreed upon price when hiring the independent contractor.
They Set Their Own Salary
There is flexibility in an independent contractor salary. It’s not set like a typical W-2 employee with a set salary of $75,000 a year. Instead, an independent contractor can determine their own salary. Many hire accountants and send themselves checks based on the set salary to avoid hefty taxes.
They Can Deny Work
Unlike a typical salaried employee at a business who must complete tasks within their scope of work, an independent contractor can say no to a job. If an offer comes along that may have a scheduling conflict, or is above the scope of work they want to do, they can say no. They can even deny working with specific clients.
This isn’t to say that once an independent contractor signs with a business to provide services, they can deny completing the task. The opposite is true, The contracts both parties sign are legally binding. Ensuring the contacts agreed upon are clear and specific with expectations from both parties is important to ensure everyone is protected.
Work on projects on their terms
The independent contractor is free to complete the task in the way they see best fit. They are not obligated to provide the service in any particular way unless noted in the contract itself. Contractors can use the tools and resources they want to finish the job as long as it remains within legal boundaries. However, if the client decides they do not like the product, they are able to cancel the contract.
Pay their own taxes
Independent contractors have to file their own taxes. The businesses they partner with don’t issue them a W-2, nor are they on a payroll that automatically deducts taxes. Independent contractors must properly complete tax returns and usually end up paying more in taxes. This is due to the lack of employees to cushion the percentage owed.
What does it mean to be Self-Employed?
Someone who is self-employed works for themselves, not for another business. They are their own employee, and most likely run their own business. Common fields of self-employment are independent contractors, freelance workers, and independent business owners.
Self-employed individuals still pay taxes. However, they can write off business expenses on their tax returns. Despite these write-offs, self-employees usually pay higher taxes because they don’t have employees to shoulder the tax amount.
These individuals share similarities to independent contractors because independent contractors are a branch of being self-employed. They can create their own hours, work with the clients they want, and still provide their own services.
The IRS defines self-employees as:
- “You carry on a trade or business as a sole proprietor or an independent contractor.
- You are a member of a partnership that carries on a trade or business.
- You are otherwise in business for yourself (including a part-time business.)”
What’s the difference between the two?
The difference between an Independent Contractor and being Self-employed boils down to if a contract for the service is created and signed. Their services are summoned in order to create a specific project in mind.
Let’s say you are looking to furnish your new in-home office. You can hire an independent contractor to build you a custom chair with your exact specifications. Both you and the independent contractor you hired agree to the terms of the chair, cost, etc. It’s a hands-off experience where they produce the product to your specifications. However, if you purchase a handmade chair that does not have a client in mind, but is created for consumption, this is purchasing from someone who is self-employed – not an independent contractor.
You can be an independent contractor and be self-employed, but it doesn’t mean that just because you are self-employed that you are an independent contractor. There are various employment opportunities under the scope of self-employment. Independent contractors work on a contractor end result basis. You are paying for the product you want specifically.
If you are looking to classify yourself or employees, let our team of experts at got1099 help you out. We understand the classification parameters and can take the weight off of your shoulders so you can run your business instead. Contact our team today.
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got1099 is a business reporting company providing business analysis reports to companies re: their 1099 independent contractors We do not provide legal advice. Consult with your attorney relating to any legal issues.