An independent contractor agreement is a contract between a non-employee worker and an employer for work on an outsourced job or project. Independent contractor agreements are also called 1099 agreements, freelance contracts, or subcontractor agreements.
What is an Independent Contractor?
An independent contractor, also called a 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.
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 details of the job, 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 certain clauses to protect the employer, including:
- Non-solicitation agreements
- Non-disclosure agreements
- Non-compete agreements
Additionally, there is a clause written in the agreement that determines copyright ownership (on behalf of either the contractor or employer) for any original work that the independent contractor produces, along with resolution methods for any legal disputes.
When Should I Use an Independent Contractor Agreement?
Both employers and freelancers can use an independent contractor agreement, though usually the former initiates the hiring process. In general, there are advantages for both sides in using an independent contractor agreement.
For Employers
You can use an independent contractor agreement if you want to outsource a specific project or use a specialist. Doing so allows you to cut down on costs, as you wouldn’t be required to provide employee benefits or pay taxes for them.
Using independent contractors also gives you more flexibility in fulfilling non-essential tasks that don’t require full-time employees. Since you would be paying for specific work or projects to be completed periodically, you wouldn’t be committing to paying a salary when work isn’t needed.
There is also less paperwork involved for hiring, filing taxes for, and terminating contractors.
For Independent Contractors
While independent contractors don’t get the same benefits offered to employees, you have more flexibility in your working schedule. As someone self-employed, you also have a lower tax liability with business deductions, and there are no taxes withheld from your income when you receive payment.
How to Hire an Independent Contractor
Hiring an independent contractor for your business involves a series of 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 absolutely 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, along with state and local labor departments, can levy fines as well as demand back payments going as far back as three years. In certain cases 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 that you need as a business owner to report contractor payments to the IRS.
Step 3: Fill Out an Independent Contractor Agreement Form
To officially record the work agreement, both you and the freelancer should complete the independent contractor agreement form. Before signing the document, go over each point to make sure they accurately reflect the negotiated terms.
Pay special care to some of the most important sections:
Services
The exact services that the independent contractor agreed to do must be as detailed as possible. You should make it clear that the independent contractor has control over how the work is done and what that process entails.
Compensation and Expenses
The IRS may determine independent contractor status 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 the conditions for termination 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 have to file IRS Form 1099 to report taxes on payments to independent contractors. This needs to be done for every independent contractor to whom you’ve paid at least $600 for services, and can be done easily with a Form 1099-MISC builder.
Sample Independent Contractor Agreement
Use the independent contractor agreement template below to hire freelancers for your business.
This Independent Contractor Agreement (this “Agreement”) is made as of this _____ day of _______________, 20_____, (the “Effective Date”) by and between: Company: ________________________ located at ________________________________________ [Address] (“Client”) and Contractor: ________________________ located at ________________________________________ [Address] (“Independent Contractor”). Client and Independent Contractor may each be referred to in this Agreement as a “Party” and collectively as the “Parties.” _______________________________________________________________________________________________________________________________________________________________________. In addition, Independent Contractor shall perform such other duties and tasks, or changes to the Services, as may be agreed upon by the Parties. ☐ A Periodic Fixed Wage. Client shall pay Independent Contractor $__________ (Check one) ☐ per hour ☐ per week ☐ per month ☐ per year ☐ other: __________. Independent Contractor will be paid: (Check one) ☐ Every week. Independent Contractor will be paid on __________ [Day of the week] of every week. ☐ Every month. Independent Contractor will be paid on the __________ [Day of the month] of every month. ☐ After Independent Contractor sends an invoice. Independent Contractor will be paid within __________ days after receiving Independent Contractor’s invoice. Independent Contractor will submit invoices for payment (Check one) ☐ at the end of every week ☐ on the __________ of every month ☐ within __________ days after completion of the Services ☐ other: _______________. ☐ Other: _________________________________________ ☐ A Set Fee. Client shall pay Independent Contractor $__________: (Check one) ☐ After the Independent Contractor completes the services. ☐ Within __________ days after receiving Independent Contractor’s invoice. Independent Contractor will submit invoices for payment (Check one) ☐ at the end of every week ☐ on the __________ of every month ☐ within __________ days after the completion of the Services ☐ other: _______________. ☐ Other: _________________________________________ ☐ After Completing Certain Milestones. Client shall pay Independent Contractor according to the following schedule: Independent Contractor will be paid: (Check one) ☐ After the completion of each milestone. ☐ Within __________ days after receiving Independent Contractor’s invoice. Independent Contractor will submit invoices for payment (Check one) ☐ at the end of every week ☐ on the __________ of the month ☐ within __________ days after completion of the Services ☐ other: _______________. ☐ Other. _________________________________________ ☐ Independent Contractor will be reimbursed. Except as otherwise specified in this Agreement, Client shall reimburse Independent Contractor for all pre-approved, reasonable and necessary costs and expenses incurred in connection with the performance of the Services. ☐ Independent Contractor will NOT be reimbursed. All costs and expenses incurred by Independent Contractor in connection with the performance of the Services shall be the sole responsibility of and paid by Independent Contractor. Termination (Check one) ☐ After all of the Services are completed. The Parties agree and acknowledge that this Agreement and Independent Contractor’s engagement with Client under this Agreement shall terminate upon the completion by Independent Contractor of the Services. ☐ After a fixed period of time. The Parties agree and acknowledge that this Agreement and Independent Contractor’s engagement with Client under this Agreement shall terminate after (Check one) ☐ __________ days ☐ __________ months ☐ other: _______________. ☐ On a specific date. The Parties agree and acknowledge that this Agreement and Independent Contractor’s engagement with Client under this Agreement shall terminate on _______________, 20_____. ☐ At will. Independent Contractor acknowledges and agrees that the engagement with Client is at will, subject to being terminated at the discretion of Client at any time, (Check one) ☐ without prior notice ☐ upon __________ days prior written notice to Independent Contractor. In addition, this Agreement may be terminated by Independent Contractor upon ___________ days prior written notice to Client. At the time of termination, Independent Contractor agrees to return all Client property used in performance of the Services, including but not limited to computers, cell phones, keys, reports and other equipment and documents. Independent Contractor shall reimburse Client for any Client property lost or damaged in an amount equal to the market price of such property. ☐ Independent Contractor will NOT be exposed to confidential information. ☐ Independent Contractor will be exposed to confidential information. ☐ Client has ownership. The Parties agree that all work product, information or other materials created and developed by Independent Contractor in connection with the performance of the Services under this Agreement and any resulting intellectual property rights (collectively, the “Work Product”) are the sole and exclusive property of Client. The Parties acknowledge that the Work Product shall, to the extent permitted by law, be considered a “work made for hire” within the definition of Section 101 of the Copyright Act of 1976, as amended, (the “Copyright Act”) and that Client is deemed to be the author and is the owner of all copyright and all other rights therein. If the work product is not deemed to be a “work made for hire” under the Copyright Act, then Independent Contractor hereby assigns to Client all of Independent Contractor’s rights, title and interest in and to the Work Product, including but not limited to all copyrights, publishing rights and rights to use, reproduce and otherwise exploit the Work Product in any and all formats, media, or all channels, whether now known or hereafter created. ☐ Independent Contractor has ownership. The Parties agree that all work product, information or other materials created and developed by Independent Contractor in connection with the performance of the Services under this Agreement and any resulting intellectual property rights (collectively, the “Work Product”) are the sole and exclusive property of Independent Contractor. Independent Contractor grants to Client a limited, non-exclusive license to use the Work Product. The Work Product is to be used only by Client, and Client may not assign, transfer, lease or sublicense any Work Product to any person or entity without Independent Contractor’s prior written consent. ☐ For the term of this Agreement, Independent Contractor shall obtain and maintain a policy of insurance, with appropriate and adequate coverage and limits, to cover any claims for bodily injury, property damage or other losses which might arise out of any negligent act or omission committed by Independent Contractor or Independent Contractor’s employees or agents, if any, in connection with the performance of the Services under this Agreement. ☐ For the term of this Agreement, Independent Contractor is NOT required to obtain and maintain a policy of insurance for injuries or damages. ______ Independent Contractor agrees and covenants that during the term of this Agreement, and for a period of __________ months following the termination of this Agreement, Independent Contractor will not, directly or indirectly, perform or engage in the same or similar activities as were performed for Client for any business that is directly or indirectly in competition with Client. ______ Independent Contractor agrees and covenants that for a period of __________ months following the termination of this Agreement, Independent Contractor will not, directly or indirectly, solicit any officer, director or employee, or any customer, client, supplier or vendor of Client for the purpose of inducing such party to terminate its relationship with Client in favor of Independent Contractor or another business directly or indirectly in competition with Client. ______ The Independent Contractor shall indemnify and hold harmless Client from any damages, claims, liabilities, loss and expenses, including reasonable attorney’s fees, arising out of any act or omission of Independent Contractor in performing the Services or the breach of any provision of this Agreement by Independent Contractor. ☐ Court litigation. Disputes shall be resolved in the courts of the State of _________________. ☐ If either Party brings legal action to enforce its rights under this Agreement, the prevailing party will be entitled to recover from the other Party its expenses (including reasonable attorneys’ fees and costs) incurred in connection with the action and any appeal. ☐ Binding arbitration. Binding arbitration shall be conducted in accordance with the rules of the American Arbitration Association. ☐ Mediation. ☐ Mediation, then binding arbitration. If the dispute cannot be resolved through mediation, then the dispute will be resolved through binding arbitration conducted in accordance with the rules of the American Arbitration Association. IN WITNESS WHEREOF, this Agreement has been executed and delivered as of the date first written above.Independent Contractor Agreement
State of ______________
Rev. 133C77C
INDEPENDENT CONTRACTOR AGREEMENT
__________________________________
__________________________________
Client Signature
Client Full Name
__________________________________
__________________________________
Independent Contractor Signature
Independent Contractor Full Name