An independent contractor agreement is a contract between a non-employee worker and an employer for work on an outsourced job or project.
Learn more about independent contractors and hiring them below.
Independent Contractor Agreement – By State
- District of Columbia
- New Jersey
- New Mexico
- New York
- North Carolina
- North Dakota
- Rhode Island
- South Carolina
- South Dakota
Independent Contractor Agreement – By Type
What is an Independent Contractor?
An independent contractor or freelancer is a self-employed individual who offers temporary services to another person or company. They can also be a business owner that serves the public, such as a veterinarian or a lawyer.
Generally, the IRS defines an independent contractor as someone who can control how the work will be done and what will be done. The employer can only dictate the results of the work assigned and not the process.
Independent contractor status is also granted based on whether they receive employee benefits and if the employer handles financial aspects of the contractor’s job, such as reimbursing expenses or providing supplies.
How to File Taxes as an Independent Contractor?
Since the IRS classifies independent contractors as self-employed workers, they’re subject to Self-Employment Tax requirements.
They must fill out a W9 form to file taxes, and each employer that has paid them at least $600 for their work must send them an IRS Form 1099 for that tax year.
What is an Independent Contractor Agreement?
An independent contractor agreement is a document that an employer uses to hire a freelancer for a specific job. By extension, it distinguishes the independent contractor from an employee of the business for legal and tax purposes.
The agreement lays out the job details, from the service provided and the length of the work term, to how the independent contractor will be paid.
As with any employment contract, independent contractors are also limited by specific clauses to protect the employer, including:
Additionally, a clause in the agreement determines copyright ownership (on behalf of either the contractor or employer) for any original work the independent contractor produces, along with resolution methods for any legal disputes.
How to Hire an Independent Contractor
Hiring an independent contractor for your business involves the steps and documentation necessary to maintain the freelancer-employer relationship.
Step 1: Correctly Classify an Independent Contractor
For tax purposes, the IRS is strict about businesses correctly classifying an independent contractor, so the best practice is to be sure whether the person you’re hiring qualifies as such.
Using a tax professional (e.g., a CPA) or submitting IRS Form SS-8 to get an official determination would cover your bases.
Misclassifying employees as independent contractors carries a high penalty. The IRS and state and local labor departments can levy fines and demand back payments going as far back as three years.
In some instances, it might even be considered a criminal charge.
Step 2: Request a Completed W9 Form
Independent contractors must complete an IRS W9 Form for every employer that has paid them at least $600.
A W9 Form builder can help you obtain the taxpayer information needed as a business owner to report contractor payments to the IRS.
Step 3: Fill Out an Independent Contractor Agreement Form
You and the freelancer should complete the independent contractor agreement form to record the work agreement officially.
Before signing the document, review each point to ensure they accurately reflect the negotiated terms.
Pay particular care to some of the most important sections:
The services the independent contractor agreed to do must be as detailed as possible. It would be best to clarify that the independent contractor controls the work and what that process entails.
Compensation and Expenses
The IRS may determine the status of an independent contractor based on how you handle business expenses for the contractor and how they’re being paid.
Non-compete, Non-solicit, Non-disclosure, and Product Ownership
As non-employees, independent contractors are not subject to basic employee restrictions, so you should clearly state the limits of what they can do.
Legal Disputes and Termination
To avoid complications, you can set forth the conditions for the termination of this agreement and resolutions to any legal disagreements in the document itself.
This protects both you and the independent contractor.
Step 4: Send Out IRS Form 1099
You must file IRS Form 1099 to report taxes on payments to independent contractors. This needs to be done for every independent contractor you’ve paid at least $600 for services and can be done quickly with a Form 1099-MISC.
What Happens When Employees Are Misclassified As Independent Contractors?
There are penalties for classifying employees as independent contractors. As the U.S. Department of Labor (DOL) and the IRS regularly conduct investigative audits to bring such situations to light, avoiding misclassification is essential.
The severity of the consequences for misclassifying independent contractors is whether fraudulent, intentional, or unintentional. The penalties include:
- $50 fine for each unfiled W-2 Form
- Penalties for withholding incomes taxes – potentially 1.5% of paid wages, 40% of FICA taxes not taken from employee wages, and potential interest for late filing
- Penalty for a Failure to Pay Taxes to equal 0.5% of the unpaid tax liability for each month up to 25% of the total tax liability.
Sample Independent Contractor Agreement
Check out our independent contractor agreement sample and PDF/Word templates below to hire freelancers for your business.
Frequently Asked Questions
Is an independent contractor agreement legally binding?
An independent contractor agreement is legally binding once both the client and the contractor have signed it. Once signed, both the client and contractor are bound to the terms of the agreement.
How do you terminate an independent contractor agreement?
To terminate an independent contractor agreement, you need to look at the terms and termination section of the agreement.
The contract could be terminated after a set period, upon completion of the agreed work, or, if stated, after notice is given to terminate the agreement early.
What should be included in an independent contractor agreement?
An independent contractor agreement needs to, at a minimum, include the following:
- Services provided
- Term and termination
- Acknowledgment that the independent contractor is an independent contractor
- Ownership of work product (including intellectual property rights)
- Governing law
The agreement could also include sections and additional terms such as:
- Mutual representations and warranties
Can I write my independent contractor agreement?
If you hire an independent contractor, you can write your agreement. The best way is to use a template to ensure you don’t miss out on any important information.