An independent contractor is a natural person, business, or corporation that provides goods or services to another entity under terms specified in a contract or within a verbal agreement. Unlike an employee, an independent contractor does not work regularly for an employer but works as and when required, during which time he or she may be subject to the Law of Agency. Independent contractors are usually paid on a freelance basis. Contractors often work through a limited company or franchise, which they themselves own, or may work through an umbrella company.
In the United States, any company or organization engaged in a trade or business that pays more than $600 to an independent contractor in one year is required to report this to the Internal Revenue Service (IRS) as well as to the contractor, using Form 1099-MISC. This form is merely a report of monies paid; independent contractors do not have income taxes withheld from their pay as regular employees do.
Independent contractor versus employee
Sometimes, it is not a straightforward matter to determine who is an independent contractor and who should be classified as an employee. To make a determination, the IRS in the USA advises taxpayers to look at three aspects of the employment arrangement: financial control, behavioral control, and relationship between the parties. While some independent contractors may work for a number of different organizations throughout the year, there are also many who retain independent contractor status even though they work for the same organization for the entire year.
Generally speaking, independent contractors retain control over their schedule and number of hours worked, jobs accepted, and performance of their job. In addition, they may have a major investment in equipment, furnish all their own supplies, provide their own insurance, repairs, and all other expenses related to their business. They may also perform a special service that is not in the normal course of business of the employer. This contrasts with the situation for regular employees, who usually work at the schedule required by the employer and whose performance is directly supervised by the employer. However many companies (particularly in the freight transport industry) specify the contractor's schedule, require purchase of vehicles from the company and prohibit work for other companies.
Examples of occupations where independent contractor arrangements are typical:
- Accountant
- Barber or hair stylist
- Court Reporter
- Dry cleaner
- Engineering Consultant
- General contractor
- General Practitioner
- Hair Stylist
- Interpreter or Translator
- Lawn care worker
- Market stall
- Massage therapist
- Newspaper Carrier
- Personal trainer
- Pool Maintenance Person
- Private investigator
- Private military company
- Radio presenter (in radio jargon, referred to as a "swing jock")
- Private security
- Professional wrestler
- Professional athlete
- Real estate agent
- Sales representative
- Short term university instructor
- Stock broker
- Talent agent
- Tattoo artist
- Taxi Driver or limousine driver
- Telephone and live chat psychic
- Truck Driver/Operator
Advantages and disadvantages
Life as an independent contractor has both benefits and hindrances.
- Since they are rarely tied to an employer, they are free to set their own rules of business, limited only by bargaining power.
- Since they usually develop a large network of clients, the loss of one or two often has a negligible effect.
- Many people simply like the idea of "being your own boss." Aside from materialistic benefits, many people simply enjoy not having to answer to a supervisor.
- As an artist/author of any tangible artwork, such as paintings, sculptures, photographs, or written works, a person is entitled to exclusive copyright ownership if they created the work as an independent contractor. If the person created such works while in the employ of another person or corporation, the rights belong to the employer (under most standard employment contracts).
- In the United States employer misclassification of employees as "independent contractors" to avoid employment taxation and regulation is widespread.
- An independent contractor can itself be a business with employees; however, in most cases in the United States independent contractors operate as sole a sole proprietorship or single-member limited liability company. This means the independent contractor, as a business owner, incurs its own expenses to provide the contracted service, must acquire its own equipment to perform the service, and is responsible for business filings such as income tax returns.
- Independent contractors are responsible for their own self-employment tax, which consists of both halves of the FICA tax amount. An employee only pays the employee portion of the FICA tax. Self-employment taxes are not withheld from the earnings of independent contractors who are required to voluntarily declare and pay estimated earnings taxes to the IRS, which can lead to a trap for contractors who run into financial difficulty and become tempted to put off making the required estimated tax payments.
- There are several monetary incentives that are guaranteed to employees in the United States, but not independent contractors. Examples include worker's compensation and unemployment insurance; however, independent contractors are allowed to make Individual Retirement Account contributions.
An independent contractor in tort
The employer of an independent contractor is generally not held vicariously liable for the tortious acts and omissions of the contractor, because the control and supervision found in an employer-employee or Principal-Agent relationship is lacking. However, vicarious liability will be imposed in some circumstances:
- where the contractor injures an invitee to the real property of the employer,
- the contractor is involved in an ultra-hazardous activity (one likely to cause substantial injury, such as blasting with explosives), or
- the employer is estopped from denying liability because he has held out the independent contractor as if he were simply an employee or agent.
- the employer is involved in an operation subject to obligations imposed by an public authority
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