An independent contractor agreement is a contract between a non-employee worker and a company for work on an outsourced job or project.
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 Agreement?
- When to Use an Independent Contractor Agreement
- Parts of an Independent Contractor Agreement
- How to Hire an Independent Contractor
- Legal Implications of Contractors vs. Employees
- Sample Independent Contractor Agreement
- Frequently Asked Questions
What Is an Independent Contractor Agreement?
An independent contractor agreement is a document a company uses to hire a contracted worker for a specific job. By extension, it distinguishes the independent contractor from an employee of the business for legal and tax purposes.
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.
As with traditional employment contracts, independent contractor agreements often limit the worker’s abilities by including the following clauses:
- Non-solicitation agreements
- Non-disclosure agreements
- Non-compete agreements
When to Use an Independent Contractor Agreement
Here are some instances when it would be wise to implement an independent contractor agreement:
- When you need to hire temporary work: Write an independent contractor agreement when you need to hire temporary work to complete a specific project or meet deadlines during a particularly busy period.
- When you need specialized expertise: This agreement lets you hire highly skilled individuals who may have unique abilities that in-house employees don’t have. You can hire independent contractors specializing in graphic design, consulting, marketing, writing, and web development.
- When you want a flexible worker: Independent contractors often have great flexibility with their work arrangements. They may be able to work remotely or during odd hours when your traditional employees are unavailable.
- When you want to avoid hiring employees: Traditional employees can incur unwanted administrative costs and create more work for your human resources (HR) department.
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
Determine if the work you need would best be done by an independent contractor. Then, consider relevant details, including the intended scope of work, deliverables, and timelines.
Step 2 – Locate Potential Contractors
Locate contractors who may be able to fulfill your needs. Use tools and resources like freelancing platforms, industry associations, referrals from like-minded companies, and your professional network. Create a pool of potential candidates to narrow your options.
Step 3 – Review Candidates’ Materials
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.
Depending on your industry and the nature of your work, you may ask the candidates to perform a test piece. This way, you can better predict their suitability for the project you have in mind.
Step 4 – Conduct Interviews
Conduct interviews to test candidates on their technical knowledge. During your conversations, evaluate how they behave and ask situational questions to determine their competency in skills like following directions and reacting to change.
Step 5 – Choose a Final Candidate and Negotiate Terms
Choose a final candidate based on their interview performance and provided materials. Allow them to negotiate the terms of their contracted work. Confirm that both parties know their responsibilities and expectations.
Understand your limits before you enter negotiations so you don’t allow the independent contractor too much control over their terms.
Step 6 – Write an Agreement
Write an agreement based on the outcome of the negotiations. Include details such as the scope of work, payment terms, intellectual property rights, confidentiality obligations, and dispute resolution methods.
Step 7 – Review and Sign
Study the agreement’s terms and ensure both parties agree to them. Review legal and compliance requirements for hiring independent contractors in your state. Ensure to comply with labor regulations, tax laws, and other legal obligations.
Step 8 – Collect a W-9
Issue IRS Form W-9 to the self-employed worker and ask them to complete it. This form allows you, as a business owner, to obtain the taxpayer information needed to report contractor payments to the IRS.
Step 9 – Obtain Additional Documentation
Depending on the work your contractor will complete, you may need to request additional documentation from them, including business licenses or insurance certificates.
Step 10 – Onboard the Worker
Onboard the worker by providing them with the resources and tools needed to complete their work. For example, you may provide access to style or brand guidelines so their work adheres to your company’s standards.
Step 12 – Issue Payment
Monitor the worker’s progress and provide constructive feedback so they can improve their work. Issue payment when the contractor delivers work that adheres to the scope of work in your agreement.
At the end of each tax year, you must file IRS Form 1099-NEC to report taxes on payments to independent contractors. Complete this action for every independent contractor for which you’ve paid at least $600 for services.
Legal Implications of Contractors vs. Employees
Discover the legal implications and considerations when it comes to hiring contractors versus employees:
Who Is an Independent Contractor?
An independent contractor typically works for various clients and maintains autonomy over the way they produce work for clients. They can generally set their own schedules and implement their preferred techniques and methods when providing services.
Who Is an Employee?
An employee works under an employer’s direct control and supervision. They may enter an employment contract with their employer and can gain access to benefits and protections under labor laws, potentially including access to health insurance, retirement plans, unemployment insurance, minimum wage, overtime pay, and workers’ compensation.
Classification of Work Status
The US Department of Labor released a new method for distinguishing independent contractors from employees effective in March 2024 [1] . This new method broadened the definition of an independent contractor, allowing the Department of Labor to evaluate multiple factors and use a holistic approach when determining a worker’s classification.
Explore the six main factors the Department of Labor considers below to determine independent contractor status:
- Skill and initiative.
- The extent to which the performed work is an integral part of the entity’s operations.
- The nature and degree of control the individual maintains.
- Whether the company and worker have an ongoing working relationship.
- The investments the worker and the company make (such as who pays for business expenses).
- The opportunity for loss or profit based on managerial skill.
For tax and legal 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. Hire a tax professional or submit IRS Form SS-8 to receive an official determination.
What Happens When Employees Are Misclassified as Independent Contractors?
Misclassifying employees as independent contractors carries a high risk. Potential penalties can include the following:
- Penalties for Withholding Income Taxes: An employer who doesn’t withhold income taxes for a worker they failed to classify as an employee may face a penalty of 1.5% of the wages paid to the individual (26 US Code § 3509).
- Penalties for FICA Taxes: FICA taxes (Medicare and Social Security) consist of both the employee and employer’s portions. Suppose an employer misclassifies an employee as an independent contractor and doesn’t withhold their portion of FICA taxes. In this case, the employer must pay the owed taxes and any additional penalties that can vary.
- Interest for Late Filing: If an employer fails to file required tax forms, such as Form W-2 (Wage and Tax Statement) or Form 941 (Employer’s Quarterly Federal Tax return), they may have to pay interest charges for late filing. The interest accrues on unpaid taxes from the return’s due date until the employer pays the taxes.
Income Tax and Employment Taxes
For Independent Contractors
Since the IRS classifies independent contractors as self-employed workers, they’re subject to Self-Employment Tax requirements [2] . Clients use Form W-9 to collect necessary information about the independent contractor, ensuring they have accurate details for reporting payments to the IRS.
Each employer paying an independent contractor at least $600 for their work must send them an IRS Form 1099-NEC for that tax year. This form reports non-employee compensation and lets the worker complete their own taxes and report the total income they received.
For Employees
Employees must fill out a W-4 to inform their employers of their withholding preferences. For each tax year, employers must provide employees with W-2s so they can include their earnings and the taxes withheld from their paychecks on their tax returns.
Sample Independent Contractor Agreement
Download an independent contractor agreement template as a PDF or Word file below:
Frequently Asked Questions
How Do I Terminate an Independent Contractor Agreement?
Review the termination section of your agreement to legally terminate the agreement. You may only be allowed to terminate the agreement 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