An independent contractor is a person, business, or corporation that provides goods or services under a written contract or a verbal agreement. Unlike employees, independent contractors do not work regularly for an employer but work as required, when they may be subject to

law of agency The law of agency is an area of commercial law dealing with a set of contractual, quasi-contractual and non-contractual fiduciary relationships that involve a person, called the agent, that is authorized to act on behalf of another (called the ...

. Independent contractors are usually paid on a freelance basis. Contractors often work through a

limited company In a limited company, the liability of members or subscribers of the company is limited to what they have invested or guaranteed to the company. Limited companies may be limited by shares or by guarantee. In a company limited by shares, the lia ...

franchise Franchise may refer to: Business and law * Franchising, a business method that involves licensing of trademarks and methods of doing business to franchisees * Franchise, a privilege to operate a type of business such as a cable television p ...

, which they themselves own, or may work through an

umbrella company An umbrella company is a company that employs agency contractors who work on temporary contract assignments, usually through a recruitment agency in the United Kingdom. Recruitment agencies prefer to issue contracts to a limited company as the ag ...

. 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 A report is a document that presents information in an organized format for a specific audience and purpose. Although summaries of reports may be delivered orally, complete reports are almost always in the form of written documents. Usage In ...

this to the Internal Revenue Service (IRS) as well as to the contractor, using

Form 1099-NEC Form 1099 is one of several IRS tax forms (see the variants section) used in the United States to prepare and file an ''information return'' to report various types of income other than wages, salaries, and tips (for which Form W-2 is used inst ...

. This form includes the money paid, contractor's name, social security number, address, phone number, and an indicator about the existence of foreign bank accounts; independent contractors do not have income taxes withheld like employees.

Versus employee

The distinction between independent contractor and employee is an important one in the United States, as the costs for business owners to maintain employees are significantly higher than the costs associated with hiring independent contractors, due to federal and state requirements for employers to pay FICA (

Social Security Welfare, or commonly social welfare, is a type of government support intended to ensure that members of a society can meet basic human needs such as food and shelter. Social security may either be synonymous with welfare, or refer specifical ...

and Medicare taxes) and

unemployment Unemployment, according to the OECD (Organisation for Economic Co-operation and Development), is people above a specified age (usually 15) not being in paid employment or self-employment but currently available for work during the refere ...

taxes on received income for employees. Likewise, employees are protected from being fired without cause, and if fired or let go for other reasons are entitled to unemployment benefits, whereas independent contractors have neither protection nor entitlement. Employees are also entitled to receive

overtime Overtime is the amount of time someone works beyond normal working hours. The term is also used for the pay received for this time. Normal hours may be determined in several ways: *by custom (what is considered healthy or reasonable by society) ...

pay for work performed over the 40-hour-per-week standard, whereas independent contractors may work any number of hours (including far above this standard) with no change in pay. In the early 1990s, the IRS methodically began to look for employers who were misclassifying employees as independent contractors, and has since obtained billions of dollars in

back taxes Back taxes is a term for taxes that were not completely paid when due. Typically, these are taxes that are owed from a previous year. Causes for back taxes include failure to pay taxes by the deadline, failure to correctly report one's income, or ...

. Recently, worker classification initiatives have been a top priority for the IRS, the Department of Labor, and state agencies. In 2011, the IRS and the Department of Labor entered into a memorandum of understanding in an effort to jointly increase worker misclassification audits. The

United States Supreme Court The Supreme Court of the United States (SCOTUS) is the highest court in the federal judiciary of the United States. It has ultimate appellate jurisdiction over all U.S. federal court cases, and over state court cases that involve a point o ...

has offered the following guidelines to distinguish employees from independent contractors: The IRS, for federal income tax, applies a "right to control test" which considers the nature of the working relationship. They highlight three general aspects of the employment arrangement: #financial control #behavioral control #relationship between the parties In general, their criteria parallel those of the Supreme Court in sentiment. They include guidelines such as the amount of instruction, training, integration, use of assistants, length of professional relationship, regularity of work, location of work, payment schedule, source of funds for business expenditures, right to quit, and financial risk more typically seen with each work category. In their framework, independent contractors retain control over schedule and hours worked, jobs accepted, and performance monitoring. They also can have a major investment in equipment, furnish their own supplies, provide their own insurance, repairs, and other expenses related to their business. They may also perform a unique service that is not in the normal course of business of the employer. This contrasts with employees, who usually work at the schedule required by the employer, and whose performance the employer directly supervises. Independent contractors can also work for multiple firms, and offer their services to the general public. The distinction between independent contractors and employees is not always clear, and continues to evolve. For example, some independent contractors may work for a number of different organizations throughout the year, while others retain independent contractor status although they work for the same organization the entire year. Other companies, for example in the freight transport industry, specify the schedule for the independent contractor, require purchase of vehicles from the company and prohibit work for other companies. In July 2015, the U.S. Department of Labor issued new guidelines on the misclassification of employees as independent contractors. "A worker who is economically dependent on an employer is suffered or permitted to work by the employer. Thus, applying the economic realities test in view of the expansive definition of "employ" under the Act, most workers are employees under the Fair Labor Standards Act."

Specific occupations

Examples of occupations where independent contractor arrangements are typical:

Advantages and disadvantages

Independent contracting has both benefits and drawbacks to contractors.

Advantages

* Since they are rarely tied to an employer, they are free to set their own rules of business, limited only by

bargaining power Bargaining power is the relative ability of parties in an argumentative situation (such as bargaining, contract writing, or making an agreement) to exert influence over each other. If both parties are on an equal footing in a debate, then they w ...

. * 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). Firms in the sharing economy such as

Uber Uber Technologies, Inc. (Uber), based in San Francisco, provides mobility as a service, ride-hailing (allowing users to book a car and driver to transport them in a way similar to a taxi), food delivery (Uber Eats and Postmates), packa ...

can gain substantial advantages via the

misclassification of employees as independent contractors Misclassification of employees as independent contractors is the way in which the United States classifies the problem of false self-employment. It can occur with respect to tax treatment or the Fair Labor Standards Act. The U.S. Government Acco ...

Disadvantages

* In the United States, an Internal Revenue Service computer algorithm matches individuals with Form 1099s to the company that pays them. If an independent contractor reports more than $10,000 of earnings, or majority of income from a single source, the IRS is likely to question the independence of the worker, and investigate the company that issued the Form 1099. * Employer

either inadvertently or to avoid taxation and regulation, is widespread. Additionally, contractorization has been used as an indirect form of

union-busting Union busting is a range of activities undertaken to disrupt or prevent the formation of trade unions or their attempts to grow their membership in a workplace. Union busting tactics can refer to both legal and illegal activities, and can range ...

. * An independent contractor can itself be a business with employees; however, in most cases in the United States independent contractors operate as a

sole proprietorship A sole proprietorship, also known as a sole tradership, individual entrepreneurship or proprietorship, is a type of enterprise owned and run by one person and in which there is no legal distinction between the owner and the business entity. A sole ...

or single-member

limited liability company A limited liability company (LLC for short) is the US-specific form of a private limited company. It is a business structure that can combine the pass-through taxation of a partnership or sole proprietorship with the limited liability of ...

. 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 Self-employment is the state of working for oneself rather than an employer. Tax authorities will generally view a person as self-employed if the person chooses to be recognised as such or if the person is generating income for which a tax return n ...

, 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 pa
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 Workers' compensation or workers' comp is a form of insurance providing wage replacement and medical benefits to employees injured in the course of employment in exchange for mandatory relinquishment of the employee's right to sue his or her emp ...

and

unemployment insurance Unemployment benefits, also called unemployment insurance, unemployment payment, unemployment compensation, or simply unemployment, are payments made by authorized bodies to unemployed people. In the United States, benefits are funded by a comp ...

; but independent contractors are allowed to make

Individual Retirement Account An individual retirement account (IRA) in the United States is a form of pension provided by many financial institutions that provides tax advantages for retirement savings. It is a trust that holds investment assets purchased with a taxpayer's e ...

contributions. * In many jurisdictions, occupational safety and health regulations are less comprehensive for independent contractors.

Independent contracting in tort

The employer of an independent contractor is generally not held

vicariously liable Vicarious liability is a form of a strict, secondary liability that arises under the common law doctrine of agency, ''respondeat superior'', the responsibility of the superior for the acts of their subordinate or, in a broader sense, the respo ...

for the

tort A tort is a civil wrong that causes a claimant to suffer loss or harm, resulting in legal liability for the person who commits the tortious act. Tort law can be contrasted with criminal law, which deals with criminal wrongs that are punishable ...

ious 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 In the law of torts, an invitee is a person who is invited to land by the possessor of the land as a member of the public or one who enters the land of another for the purpose of business dealings with the possessor of the land. The status of a ...

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 Estoppel is a judicial device in common law legal systems whereby a court may prevent or "estop" a person from making assertions or from going back on his or her word; the person being sanctioned is "estopped". Estoppel may prevent someone from ...

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 a public authority

Alternatives

Due to the higher expense of maintaining employees, many employers needing to transition from independent contractors to employees may find the switch difficult. There is a transitional status for employees as an alternative to independent contracting known as being a statutory employee. Statutory employees are less expensive to hire than classic employees because the employer does not have to pay unemployment tax. But they are more expensive than independent contractors because

and Medicare taxes must be paid on wages. Similarly to independent contractors, statutory employees can deduct their trade or business expenses from their W2 earnings.

Dependent contractor

A growing number of workers do not neatly fit the government's categorizations of independent contractors and statutory employees, and are increasingly being classified as dependent contractors. Some of these contingent workforce—independent contractors, temporary workers, and part-time workers, who work when and for how long they want, such as those who work for such companies as Uber, Handybook, Inc., and

CrowdFlower Figure Eight (formerly known as Dolores Labs, CrowdFlower) was a human-in-the-loop machine learning and artificial intelligence company based in San Francisco. Figure Eight technology uses human intelligence to do simple tasks such as transcrib ...

—have filed lawsuits that argue that companies that substantially control workers' work and behaviors while working (such as at Handybook, Inc.: when to knock on customers' doors vs. ring the doorbells, and how to use the customers' bathrooms) should be covered by minimum-wage and overtime rules under the Fair Labor Standards Act, as well as receive other traditional employee protections. Wilma Liebman, former chairperson of the National Labor Relations Board, has observed that Canada and Germany have such protections in place for contingent workers. And UK Prime Minister David Cameron has appointed an overseer for freelance workers in that country, to determine how the government should support freelance workers.

References

External links

Independent Contractor Rights"Self-Employed Individuals" – IRS (U.S.)"The Application of the Fair Labor Standards Act's "Suffer or Permit" Standard in the Identification of Employees Who Are Misclassified as Independent Contractors." U.S. Department of Labor (PDF)
{{Authority control Agency law Business law Employment classifications Recruitment Taxation in the United States Fiscal policy