An independent contractor agreement is a contract between a non-employee worker and a company for work on an outsourced job or project.
This legally binding agreement outlines the details of the two parties’ arrangement, including the contractor’s service, the length of their work term, and how the company will pay the contractor.
Independent Contractor Agreement – By State
- Alabama
- Alaska
- Arizona
- Arkansas
- California
- Colorado
- Connecticut
- Delaware
- District of Columbia
- Florida
- Georgia
- Hawaii
- Idaho
- Illinois
- Indiana
- Iowa
- Kansas
- Kentucky
- Louisiana
- Maine
- Maryland
- Massachusetts
- Michigan
- Minnesota
- Mississippi
- Missouri
- Montana
- Nebraska
- Nevada
- New Hampshire
- New Jersey
- New Mexico
- New York
- North Carolina
- North Dakota
- Ohio
- Oklahoma
- Oregon
- Pennsylvania
- Rhode Island
- South Carolina
- South Dakota
- Tennessee
- Texas
- Utah
- Vermont
- Virginia
- Washington
- West Virginia
- Wisconsin
- Wyoming
Independent Contractor Agreement – By Type
- Independent Contractor Agreement - By State
- Independent Contractor Agreement - By Type
- What Is An Independent Contractor?
- When to Use an Independent Contractor Agreement
- What to Include in an Independent Contractor Agreement
- How to Hire an Independent Contractor
- Misclassifying Employees as Independent Contractors
- Sample Independent Contractor Agreement
- Frequently Asked Questions
What Is An Independent Contractor?
An independent contractor is a self-employed individual performing services for clients under a contract. They control their work methods and schedules and often complete tasks and projects for multiple clients. They set their pay rates and aren’t entitled to employee benefits.
New 2024 Worker Classification Rule
The US Department of Labor implemented a new worker classification rule in 2024 to distinguish an independent contract from an employee. This new rule imposes an “economic reality” test, heavily considering the worker’s economic dependence on the employer. It also employs a more holistic evaluation of the circumstances, considering various factors, such as the degree of control the employer has over the work and the worker’s ability for profit/loss, providing more deference to employees than previous rules.
► Independent Contractor vs. Employee
How Independent Contractors File Taxes
Independent contractors must report their income to the Internal Revenue Service (IRS). [1] They receive IRS Form 1099-NEC from clients who paid them $600 or more in a year.
They use the information from this form and other income records to report their income on Schedule C (Form 1040) and calculate their self-employment tax on Schedule SE (Form 1040).
When to Use an Independent Contractor Agreement
Here are some instances when using a customized independent contractor agreement is useful:
- You need temporary work. This agreement lets you recruit help to complete a specific project or meet a deadline during a particularly busy period.
- You need highly skilled individuals. You may need to hire individuals with unique abilities that your in-house employees don’t have.
- You want to avoid legal and financial risks. Clarifying the nature of your arrangement with a worker can help you avoid the penalties of misclassification.
What to Include in an Independent Contractor Agreement
Explore the elements of an independent contractor agreement:
- Parties: Identify the hiring company and the contractor.
- Scope of work: List the services the contractor agrees to perform and the deliverables you expect them to produce. Depending on your industry, such services may include construction work, editing, writing, and graphic design.
- Payment terms: Explain how you will pay the service provider for their services. Discuss the agreed-upon fee structure or rate, payment schedule, payment method, and any reimbursements you will provide.
- Term and termination: Describe the contractor’s working term and explain any guidelines for ending the contract early, including notice periods, termination conditions, and consequences of violating the agreement.
- Independent contractor classification: Clarify you will only recognize the worker as an independent contractor instead of as an employee.
- Confidentiality and non-disclosure: Request that the contractor doesn’t divulge sensitive company information or trade secrets during their time with the company and afterward.
- Intellectual property ownership: Highlight whether you or the other party will own the intellectual property the contractor makes.
- Insurance requirements: State whether the contractor must carry a specific amount of general liability insurance.
- Dispute resolution methods: Outline how the parties will resolve disputes arising from the agreement. You may state how you prioritize each method, including mediation, arbitration, and litigation.
- Governing law: List the state’s laws that will govern the terms of the entire agreement.
How to Hire an Independent Contractor
Step 1 – Identify Your Needs and Find Contractors
Hiring independent contractors involves considering relevant details, such as the intended scope of work, deliverables, and timelines. Then, use tools and resources like freelancing platforms, industry associations, referrals from like-minded companies, and your professional network to narrow your options and create a pool of potential candidates.
Step 2 – Review and Interview
Ask potential candidates to send you their resumes, work portfolios, and other documents that reflect their competencies. Review these materials to better understand their abilities.
During the review process or your conversations, evaluate how the contractor behaves and ask situational questions to determine their competency in skills like following directions and reacting to change.
Check Their Background
Check the contractor’s background to ensure they’re reliable and honest. If they’re a business, you can look them up on Google or read what other clients say about them on TrustPilot, BBB.org, and Yelp.
If they’re an individual, consider paying for a criminal background check to uncover any negligence or fraud in their past.
Step 3 – Negotiate Terms and Finalize Contract
Choose a final candidate based on their interview performance and provided materials. Allow them to negotiate the terms of their contracted work. Based on the negotiation outcome, write an agreement including details such as the payment terms, nature of work, intellectual property rights, confidentiality obligations, and dispute resolution methods.
It’s also recommended to use a clear and professional invoice template for both parties to reference when creating and submitting invoices.
Step 4 – Sign and Collect the IRS W-9 Form
Ensure both parties sign the contract. Collect the completed IRS W-9 form and gather any necessary additional documentation.
Step 5 – Provide IRS Form 1099
At the end of each tax year, you must provide IRS Form 1099-NEC to each independent contractor to whom you’ve compensated at least $600 and file a copy of each Form 1099-NEC with the IRS by the deadline.
Misclassifying Employees as Independent Contractors
Misclassifying employees as independent contractors can produce financial consequences for companies:
Income Tax Withholding
- Failing to withhold income taxes for misclassified employees can result in a penalty of 1.5% of the wages paid to the individual. [2]
FICA Taxes (Social Security and Medicare)
- Employers are responsible for their share and the employee’s share of FICA taxes.
- Misclassifying employees can lead to unpaid FICA taxes, which the employer must pay in full, plus potential penalties.
Interest for Late Filing
- Failing to file required tax forms like W-2s or Form 941 can lead to interest charges on unpaid taxes.
- Interest adds up from the due date until the taxes are paid in full.
Sample Independent Contractor Agreement
Download a free independent contractor agreement template in PDF or Word format below:
Frequently Asked Questions
How do I terminate an independent contractor agreement?
To legally terminate your agreement, review the termination section. You may only be allowed to terminate after a set period or upon completion of the agreed work. Some independent contractor agreements let you end the client-independent contractor relationship if you issue enough notice.
Furthermore, you might be able to terminate the agreement if the contractor breached the agreed-upon terms.
Can the parties sign an independent contractor agreement remotely?
If you want to hire a contractor living in a different city, state, or country, you can have them sign their agreement remotely. Use one of the following methods to obtain their signature even if they aren’t in the same geographic location:
- Electronic signature services, including SignEasy and DocuSign
- Email scanning and signing
- Faxing
- Digital signature generators within programs like Adobe Acrobat
Who owns the intellectual property that an independent contractor creates?
An independent contractor agreement usually grants intellectual property ownership rights to the client. However, without a written agreement, default ownership goes to the contractor, who is solely responsible for the product’s execution. Be sure to obtain prior written consent in your agreement to avoid confusion and disputes.