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.
Independent Contractor Agreement
