Join #1 A.I. tax service for freelancers

Resources

Home › Self Employment Resources › Independent Contractors

A Complete Guide to:

Independent Contractors

Tax Form Wizard

Find out which forms you'll need with this tax form recommender.

How would you describe yourself?

Choose as many as you like

Self-employed

Freelancer, independent contractor, etc

Salaried employee

Full-time or part-time W-2 employee

Business owner

LLC, S corp or partnership

What to know about working as an independent contractor?

There’s nothing like pursuing your dreams and doing a job you love. As an independent contractor, you can have both. You have the opportunity to apply your passions in the working world. But this freedom also means you’re responsible for everything business-related. That means taking care of invoices, forms and self-employment taxes. Keeping track of all the Internal Revenue Service’s (IRS) legal requirements for the different types of work can get a bit confusing. However, by the time you’re done reading this article, you’ll understand a whole lot more about independent contractors, like what is a contractor and what’s an independent contract.

Independent contractors are people who are active in an independent trade or business
Independent contractors are different from typical employees
1099 taxes are key for independent contractors

Table of contents

What is an independent contractor?...Read more

Is an independent contractor self employed?...Read more

Independent contractors vs. employees...Read more

How does an independent contractor pay taxes?...Read more

1099 independent contractor...Read more

Do independent contractors need insurance?...Read more

What is an independent contractor?

The IRS defines an independent contractor as someone who does an independent trade, profession or business and offers their services to the public. Usually, the work is done on an independent contract basis. This means that the contractor can set their own timeline, price and requirements for the project. An independent contractor can be a sole proprietor , a private contractor with an incorporated business or a Limited Liability Company (LLC). Any business entity can operate independently and be considered a private contractor. The term independent means the person works solo and isn’t considered an employee with the company they have an independent contract with.

Image with text explaining characteristics of independent contractors such as providing own tools, project-based payment, and ability to contract work to others. #selfemployed #freelancer #taxes

Quick tip

An employer cannot consider you an independent contractor to avoid local, federal or state taxes. If your job characteristics resemble an employee, you should be considered one.

Some independent contractor examples are as follows:

A dancer who rents out a dance studio and teaches private lessons with or without assistants
A mechanic who sets his own work timings, buys all the car parts for the repairs and sets his own prices for services
An attorney who has their own office, advertises for their services and bills clients by the hour
A freelance writer who writes for newspapers, blogs or articles and sets their timeline and fee for each content piece

Is an independent contractor self employed?

There are a lot of factors to consider when distinguishing between an independent contractor and a self-employed person. Things like the location of the work and the industry can have an impact. Independent contractors are considered self-employed, but not every self-employed person is considered an independent contractor. If you don’t work for an employer, you’re considered self-employed. Some examples of self-employed individuals are freelancers, photographers and artists and social media influencers. But a private contractor is a type of self-employed person who does work for a company, organization or individual client for a set period of time, usually on a temporary project. For example, if a company hires you to design the front landscape for a business, you'd probably be considered an independent contractor since the work ends once you’ve finished the project. But, if you sell your own landscaping products for anyone to buy, you’d be considered self-employed and are most likely not an independent contractor.

Independent contractors vs. employees

As the name suggests, an independent or private contractor has a lot of freedom and independence when it comes to their work. They can set their own independent contract agreements, work timings and client base. There are some clear differences between a private contractor and an employee, but things are never as straightforward as they seem. To determine if an individual does indeed qualify as an independent contractor, U.S. Labor Law looks at three different aspects between the business and worker:

Financial: Does the company control the payment?
Behavior: Does the company control what the worker does?
Relationship: Is the work on an independent contract basis or permanent?

Image describing the differences between employees and contractors. Employees receive W-2 and benefits, while contractors receive 1099 and provide their own tools and healthcare. No mention of self-employment or taxes.

How does an independent contractor pay taxes?

Since a private contractor isn’t considered a W-2 employee on a payroll, the IRS considers them a 1099 independent contractor. Typically, when you’re on an employer’s payroll, your taxes are withheld from your paycheck. This includes taxes for things like Social Security and Medicare. Your employer will contribute half of your required Social Security and Medicare tax payments. As a private contractor, you’re considered both the employer and the employee, so the 15.3% FICA taxes for Social Security and Medicare become your responsibility.

1099 independent contractor

You may have heard of the 1099 independent contractor form. It’s an important document that you’ll need when it comes time to file taxes for independent contractors. Employees are provided with a W-2, whereas contractors are sent a 1099. The 1099 independent contractor is a form that each client sends to the IRS and to the contractor that reports the payment made. When it comes to federal taxes, contractors are required to pay estimated taxes on their income. The amount depends on your tax bracket and your deductions. You deduct things like advertising expenses, taxes and licenses, education expenses and even car mileage. You’ll also need to pay state and local taxes, depending on your location.

Do independent contractors need insurance?

As a 1099 independent contractor, It’s a good idea to consider protecting yourself from liabilities and risks. Operating a business comes with a lot of uncertainty and unknown risks. General liability insurance can protect you from being held accountable for any harm that may come to an employer or their business. Some clients even require liability insurance as part of the independent contractor agreements. The type of insurance you need depends on the nature of your work as a 1099 independent contractor. Let’s say you’re a woodworking contractor. You might need property insurance to protect your saws, blades and other tools if they’re stolen, lost or destroyed. But if you’re an appraiser, you might need insurance to protect you if you make any mistakes on a client’s appraisal that costs them money. It’s a good idea to establish independent contractor agreements and determine if any sort of insurance is needed for your work.

Adjusted Gross Income

A lot of terms get thrown around when it comes to the tax season and your adjusted gross income (AGI) is one of them.