Independent Contractor: Definition, How Taxes Work, and Example

What Is an Independent Contractor

Companies don’t provide typical employee benefits to independent contractors like health insurance, paid vacations, maternity leave, and 401(k) contributions. Independent contractors provide goods or services according to the terms of a contract they have negotiated with an employer. Independent contractors are not employees, and therefore they are not covered under most federal employment statutes. They are not protected from employment discrimination by Title VII, nor are they entitled to leave under the Family Medical Leave Act. Employers are not required to pay independent contractors overtime under the Fair Labor Standards Act or provide accommodations for a contractor’s disabilities under the Americans with Disabilities Act.

What Is an Independent Contractor

They can set their hours, pursue work they love, and decide what work they will and will not accept. Those who can work from home may save money on transportation and the wardrobe needed to work in an office. If you work for someone else, they typically provide the office, computer, and everything else that goes with it. While you can deduct these expenses, you still must have the money to pay for them first.

How do independent contractors and employees differ?

Plus, an employer does not have to pay employment taxes for an independent contractor. Even though some independent contractors require hefty payments, there are far lower overhead costs compared to hiring full-time employees. With self-employed workers, employers are not required to subsidize health plans, contribute to unemployment or retirement, provide minimum wage, or offer paid time off. There is also a lot of flexibility when it comes to how to pay contractors. A 1099-MISC is used to report payments made to independent contractors (who cover their own employment taxes). A W-2 form, on the other hand, is used for employees (whose employer withholds payroll taxes from their earnings).

Gig workers perform temporary, very short-term jobs — often procured through a consumer-facing app — to provide on-demand services. The most common types of gig workers are ride-hailing app drivers (i.e. Uber and Lyft), food delivery drivers, and other services that can be ordered online, such as furniture assembly via Taskrabbit. In addition, employers may be liable for their own negligence in selecting independent contractors if they were negligent in hiring them. Employers are also liable for any physical harm caused by any act committed by independent contractors pursuant to orders or directions negligently given by employers. In contrast to independent contractors, you have the right to supervise them more closely and require their adherence to internal company policies. Employees are also more likely to have open-ended job descriptions within a specific role.

What’s the Difference Between W-2 Employees and 1099 Contractors?

Because of this, it’s more common for freelancers to work with multiple companies at the same time. Estimated quarterly payments are required to be made by independent contractors who expect to owe more than $1,000 in taxes for the year. Independent contractor taxes are handled differently than employee taxes. Instead, independent contractors pay the Self-Employment Contributions Act (SECA) tax on what they earn.

However, an employer can become the owner if the independent contractor agreement specifically assigns to him or her the rights to any work made under or according to the agreement. It is extremely important to read an independent contractor agreement very carefully before you sign to ensure that you do not give away your rights to valuable intellectual property. When work is considered integral to the business, it is more likely that the person is an employee. On the other hand, work that is temporary and non integral may imply independent contractor status. You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). What matters is that the employer has the legal right to control the details of how the services are performed.


The business is also responsible for providing benefits such as sick pay, vacation days, and parental leave. The company has strict rules to keep to around elements of work such as overtime, working hours, and working conditions. Employers must treat 1099 employees just like independent contractors, including freedom from managerial control, the ability to set work hours, and more. A tax attorney can help you generate the legal documents necessary for managing 1099 employees. Across the United States, law and regulation regulate the employment of employees, including minimum wage, anti-discrimination, and overtime laws.

What does it mean to work as an independent contractor?

The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. If you are an independent contractor, then you are self-employed.

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