The independent contractor agreement is an agreement between a contractor and an employer that the contractor will perform a paid service for the employer, often without the employer being responsible for taking taxes out of the contractor’s payment, providing workers compensation or other benefits, or having much direction over the contractor.
It is important to note the difference between an employee and an independent contractor. Independent contractors are often allowed more freedom in how they work, although they stick to deadlines and work directly for the people who contract them. Employees often must show up in a work space and perform all steps of their job according to their employer’s wishes or guidelines. Also, employers are not held responsible for independent contractors’ health benefits, workers compensation, tax withholdings, etc. In many cases, independent contractors are hired for a specified period of time, and the contract is terminated when the deadline is reached.
In the 1990’s, the Supreme Court ruled on several guidelines to define independent contractors versus employees, to help prevent employers from abusing the financial benefits of hiring contractors rather than paying Social Security and Medicare taxes. Together, these guidelines create the “right to control” test, which focus on three aspects of the employer/employee relationship: financial control, behavioral control, and relationship between the parties. If the employer has more control in these areas, then the contractor is potentially an employee, rather than an independent contractor, and the contractor can sue for Social Security and tax withholdings.
Local laws can define independent contractors and their contracts differently, so check your local employment laws when filling out an independent contractor agreement. Additionally, the IRS website has a good definition of independent contractors, so check with that government agency for tax information.
How it Works
Independent contractor agreements cover many types of employment. For example, if you wish to redesign your kitchen, you can hire a designer as a contractor, who will then work for you without specified hours and with specified pay per week, month, or due at the completion of the contract. As the hiring party, you have little control over when and how the contractor works for you, as long as the job is completed by a deadline.
These contracts also work well for small business owners, who need to temporarily expand their workforce without shouldering a financial burden. If the business owner needs a software developer for 6 months, for example, that person can be hired on and offered office space, but otherwise left alone to create the software to specifications in the contract. If the business owner tries to have more control over the independent contractor, such as specifying which hours the person works, then the contractor could sue for a regular employment contract, or local laws could terminate the contract. Check your local employment laws for specific definitions of how to treat contractors vs. employees.
Other workers often hired under independent contract agreements (because they can work multiple locations or their work hours do not have to be specified by an employer):
Accountants and bookkeepers
- Real estate agents
- Interpreters or translators
- Professional athletes
- Professional speakers
- Massage therapists
- Hair stylists and manicurists
Download our free independent contractor agreement form to see the basic elements of an independent contract between two or more parties. If you have specific questions about local regulations, check your local employment laws, or consider consulting with an attorney.