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What Is an Independent Contractor
An independent contractor is a freelance worker, consultant, or specialist that a company hires to carry out an essential, temporary job on their behalf. The worker in question is contracted by the business on a short term basis for however long it takes to complete the job as agreed.
These freelance workers differ from regular full-time employees as they will often complete their own tax forms, own their own tools, and work for numerous clients. They will also not be entitled to the other usual employee benefits, although they may receive reasonable compensation for any expenses incurred.
Examples of some of the types of independent contractors that enterprises often hire include:
Legal experts and attorneys
Writers and journalists
What is an Independent Contractor Agreement
The contract signed between a contractor and their client is known as an Independent Contractor Agreement. This legal document is designed to outline the core elements of the transaction between the hiring client and the contractor.
An Independent Contractor Agreement can also be known as a:
General Contractor Agreement
How to Become an Independent Contractor
If the flexibility and freedom of being self-employed appeals to you personally, you may consider becoming an independent contractor. There are however a few important steps that you’ll need to compete in order to do so.
First of all you’ll have to register your new business with your local state. Even if you’re working independently without additional staff, you must create a record of the business. That means choosing a name for your new enterprise, getting a business license, registering as an LLC or as an S-Corp as necessary, and writing a business plan.
Once you’re properly set-up with the correct credentials and you’ve created a business bank account, you’ll then be able to start working with clients. You can do this by advertising your services locally or building up a strong reputation through your networks or word of mouth.
How to Hire an Independent Contractor
Companies and individuals often hire independent contractors when they require a service that they cannot perform without outside help. The process of choosing and recruiting a contractor is a relatively straightforward procedure.
Generally, the hiring process for independent contractors follows these steps:
A contractor is chosen: For the first step of the process, clients need to identify a suitable freelancer who can fulfill the requirements of the project or task.
Negotiations with the contractor should be held: Clients should discuss the potential terms of any future agreements with the contractor they’re approaching. This will help decide important key points of the contract such as its length and the amount of money the freelancer will be paid.
The contractor must complete IRS Form W-9: Before the Independent Contractor Agreement is completed and signed the chosen freelancer must complete IRS Form W-9. This records their Social Security number and Employer Identification Number (EIN) and allows their details to be kept on file by the client.
Create the Independent Contractor Agreement: Now that the main outline of the agreement has been defined between client and contractor it’s time to create the actual document. Start your own Contractor Agreement here on LawDistrict now and follow our simple step-by-step instructions to set up a personalized final document.
Sign the agreement: In the last step of this process the completed Independent Contractor Agreement needs to be signed by both parties to make it legally binding. It’s not a legal obligation to have the document signing witnessed, although some financial institutions insist on this as a requirement.
Writing a Contractor Agreement
It’s essential to be specific when writing a Contractor Agreement. The final result will be a binding legal contract between you and your client or contractor. The details should be clear and comprehensible so that they can be easily understood.
To make all the terms and conditions of the deal extra explicit, write in full sentences on the template. You should also avoid ambiguous terms and abbreviations that could lead to misunderstandings and possible legal challenges.
Additionally, make sure to use consistent terminology. Don’t refer to parties by their personal names in clauses and when describing additional terms. Instead, use established contractual terms, such as ‘Client’ or ‘Contractor’.
A completed Contractor Agreement explains the most important features of what has been agreed, creating a record of what services need to be done and how the freelancer will be compensated for their work. The terms of the contract will stipulate elements of the deal such as:
The services the contractor will provide
How long the project will take
How much the client will pay the contractor (including any reasonable expenses)
Additional clauses on confidentiality, intellectual property rights and steps for ending the contract early
Independent Contractor Agreement FAQs
There are many questions that arise around the subject of Independent Contract Agreements. If you’re still a little unsure how these essential legal contracts work look over our FAQs now for the answer you need.
How To File Taxes as an Independent Contractor?
In addition to filing their usual personal tax return, independent contractors must file Form 1099 when they provide their annual declaration. This is necessary for self-employed workers as they must pay an additional 15% tax for their Social Security and Medicare needs.
The taxes paid by a company or client as part of an Independent Contractor Agreement do not count towards the freelancer’s tax return. Contractors are responsible for paying their own taxes must ensure to keep enough money aside to cover their tax obligations.
What Forms Do I Need To Hire an Independent Contractor?
The most important document you will need to hire freelancers and independent contractors is an Independent Contractor Agreement. This outlines the terms of a deal between a client and contractor and makes the agreed terms legally binding.
It will also be necessary to have an IRS form W-9 available when you begin the process of hiring a contractor. This is to be completed by the freelancer, detailing his/her Social Security number (SSA) and Employer Identification Number (EIN) before the final agreement is signed. The completed Form W-9 is then kept by the client for their records.
Independent Contractor VS Employee: What is the Difference?
A clear distinction is usually drawn between contractors and employees. Freelancers can’t work constantly and exclusively for the same employer or they may lose their independent contractor status.
However, the big benefit of working as a contractor is freedom and independence. You can still choose who you work for but you don’t need to stay employed with them for any longer than necessary. You also have more autonomy over how you do your work as you have no managers or bosses to answer to.
Hiring contractors with an Independent Contractor Agreement can also be beneficial for companies too. It allows them to flexibly get the expertise they need for as long as they need it without shelling out for the usual HR costs and tax payments they would have to pay to hire a full time employee.