An independent contractor agreement is a contract between a non-employee worker and a company for work on an outsourced job or project.
This written 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.
When to Use
- When you need to hire temporary work to complete a specific project or meet deadlines during a particularly busy period.
- When you need highly skilled individuals who may have unique abilities that in-house employees don’t have.
- When you want to avoid legal and financial risks associated with misclassifying employees as independent contractors.
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
- Who Is An Independent Contractor?
- Parts of an Independent Contractor Agreement
- How to Hire an Independent Contractor
- Misclassifying Employees as Independent Contractors
- Sample Independent Contractor Agreement
- Frequently Asked Questions
Who Is An Independent Contractor?
An independent contractor is a self-employed individual who provides services to clients under a contract.
- Works for multiple clients
- Controls work methods and schedule
- Not entitled to employee benefits
How Independent Contractors File Taxes
Independent contractors are responsible for reporting their income to the IRS. They receive IRS Form 1099-NEC from clients who paid them $600 or more in a year.
They use the information from this form, along with other income records, to report their income on Schedule C (Form 1040) and calculate their self-employment tax on Schedule SE (Form 1040).
Parts of 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 work the contractor agrees to perform and the deliverables you expect them to produce.
- Payment terms: Explain how you will pay the independent contractor 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, not 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 which party will own the intellectual property the contractor makes. In most cases, it will be the hiring company.
- 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
Initially, consider relevant details, including 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. 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 they behave and ask situational questions to determine their competency in skills like following directions and reacting to change.
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 scope of work, payment terms, intellectual property rights, confidentiality obligations, and dispute resolution methods.
Understand your limits before you enter negotiations so you don’t allow the independent contractor too much control over their terms.
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 paid at least $600 for services 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 lead to significant financial penalties for businesses.
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, as per 26 US Code § 3509.
FICA Taxes (Social Security and Medicare)
- Employers are responsible for both 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 accrues from the original due date until the taxes are paid in full.
Sample Independent Contractor Agreement
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 agreements let you end the arrangement if you issue enough notice.
Furthermore, you might be able to terminate the agreement if the contractor breached the agreed-upon terms.
Is an Independent Contractor Agreement Legally Binding?
An independent contractor agreement is legally binding once the client and contractor sign it. Their signatures bind them to the agreement’s terms.
What Are Options for Signing an Independent Contractor Agreement Remotely?
If you want to hire a contractor living in a different city, state, or country, 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