Independent contractors are self-employed individuals who provide work under a contract for services.
For legal and tax purposes, they’re not classified as employees.
Independent contractors typically have specialist skills or knowledge that’s required on a fixed-term basis.
They also provide their tools and equipment.
Commonly-cited advantages of working as an independent contractor include relative freedom to line workload and business rules and not reporting back to a superior.
Independent contractors also are liberal to build a network of companies and work for a spread of companies, barring any non-competing clauses in their contracts.
Another significant advantage is independent contractors will typically own the copyright to any works created within the line of duty, whereas employees generally hand over this right.
Disadvantages of being an independent contractor include the shortage of rights and benefits related to being classified as an employee, like contributory pensions.
Contractors also are liable for their tax affairs and must submit accurate returns to HMRC.
For HR, independent contractors can provide additional resources when needed without the financial burden of permanent employment.
However, they’re typically costlier than employees and have more bargaining power because (most of the time) they’re going to have a roster of other clients.
The tax framework of working with independent contractors can also be more complex than PAYE.
What Can Employers Require From an Independent Contractor?
While a corporation contracting for someone’s services can set the outcomes and, therefore, the final products, they can’t tell a contractor how, when, or where to do the work.
Independent contractor opportunities their hours of labor, their worksite, and therefore the needed equipment.
A contractor makes all of the choices about product or service production as long because it meets the customer’s expectations.
An independent contractor provides the independent contracted services independently, not as an employee.
The contracting agency doesn’t control whether the contractor subcontracts some or all of the work to subcontractors.
Independent contractors pay their income and FICA taxes by using the acceptable IRS forms and procedures.
IRS Guidance About Contractors
According to the IRS, “The general rule is that a private is an independent contractor if the payer has the proper to regulate or direct only the results of the work and not what is going to be done and the way it’ll be done.”
Factors that provide evidence of the degree of control and independence of the contractor fall under three categories:
Does the corporate control or have the proper to regulate what the worker does and how the worker does his or her job?
Are the business aspects of the worker’s job controlled by the payer? These include how the worker is paid, whether expenses are reimbursed, who provides tools, supplies, etc.
Type of relationship
Are there written contracts or employee benefits, like a pension account, insurance, or vacation days? Will the connection continue, and is that the work performed a vital aspect of the business? If an employer can affirm these questions affirmatively, the independent contractor’s connection isn’t an employment relationship. Instead, a contractual arrangement exists.
Frequently Asked Questions (FAQ)
Difference between a sole proprietor and an independent contractor?
An independent contractor is someone who works for somebody else but not as an employee. The first difference between an independent contractor vs sole proprietor is that an independent contractor usually provides a service instead of a product.
How to become an independent contractor?
- Own a minimum of a part of your own business.
- Work for multiple companies during each tax year.
- Have specialized skills or expertise.
- Work on a short-lived, short assignment or project.
- Work for a client for a limited period of your time and not permanently.
How does an independent contractor pay taxes?
As a self-employed individual, you’re required to pay federal income tax, Social Security, and Medicare taxes on your own, either through quarterly income tax payments or once you file your income tax return must pay taxes on income as you earn it.
How to file taxes as an independent contractor?
You’ll need to file an income tax return with the IRS if your net earnings from self-employment are $400 or more. Alongside your Form 1040, you’ll file a Schedule C to calculate your net or loss for your business. You’ll file a Schedule C-EZ form if you’ve got but $5,000 in business expenses.