Independent contractor is a person or a licensed business that provides services for a short period, based on a contract. Employees have employers, while independent contractors have clients.
In contrast to traditional employees, independent contractors do not have an 8-hour working pattern or monthly salary. They can choose their working time, and payments will be project-based or hourly. The work is controlled by clients however the contractor has complete freedom of execution on the decided terms and conditions.
Most companies hire independent contractors either for short-term projects or for exceptional skills. They are also known as 1099 contractors and simultaneously work for one or more clients.
Independent contractor agreement
It is a usual practice to have an independent contractor agreement before the start of a client-contractor association.
The agreement will hold key information on the major milestones expected in the project, the time frame to reach the milestones, the preferred completion time, compensation details, the mode of independent contractor payment, frequency of payment, and other related aspects.
Documenting the agreed decisions helps both employer and the contractor to stay focused on the project, and also eliminates any chances of disputes that arise at a later stage.
The independent contractor agreement also proves that the company hired the independent contractor temporarily and not as an employee, which is necessary for tax compliance.
Becoming an independent contractor
Any skilled professional can become an independent contractor. All it needs is consistency and focus on work. This is because the independent contractor needs to deliver the job on time and handle different projects.
If the professional intends to expand the scope as an independent contractor, there are a few things to consider.
- Give the business a name
- Identify which business structure to follow
- Get a license for the business
- Open a bank account under the business name
- Advertise the business to get clients
If it is to build a career, these extensive steps are not necessary. The professional has to report the income using form 1099.
Examples of an independent contractor
Any skilled professional can work as an independent contractor. It means the person offers the service for a limited time or in a specific instance. Some of the independent contractor jobs in the corporate world include:
- Graphic Designer
- Content Writer
- Software Developer
- Project Consultant
- Business Analyst
The arena is diverse, and so are the designations. Experts in any field can take up projects on a short-term basis and associate with client projects.
Independent contractor Payment
Independent contractor compensation is simple. The only things the clients need to consider are the currency preference and mode of transaction. All payment information must be included in the independent contractor agreement. Usually, the payments are based on the following:
The agreement between the client and the independent contractor will explicitly state the different milestones to be achieved as the project progresses. So the payments can be made timely when these are completed.
The rate for working one hour will be fixed, and the amount will be calculated considering how many hours the professional puts into the job.
Having a written agreement eliminates any chance of misunderstanding between the parties involved. It can specify the milestones to be completed, the expected time frame to finish, and the payment to make after each completion. Also, note the clients do not withhold any federal or state income tax from the payment of independent contractors.
Independent contractors paying taxes
It is the responsibility of independent contractors to pay state and federal taxes. It is done every quarter. The income source is reported using Form 1099.
In the case of independent contractor taxes, if the person earns more than a threshold value, it has to be filed by Form 1040. Along with this, other financial details will also be filed to determine whether to pay taxes or avail a refund. The form has three schedules for the income, credit, and deductions to be discussed extensively.
To the independent contractors’ relief, they do have some significant tax deductions available.
Advantages and Disadvantages of independent contractors
So far, we have covered the essential things to know about what to expect of an independent contractor; let us look at the various perspectives it offers. Like every other thing, independent contractors have their ups and downs too. Take a look.
|Unavailability of employee benefits
|Higher Income as compared to a regular employee
|Need to cover overhead expenses by themselves
|Timelines decided by the professional at own pace
|Lack job security
|No federal or state taxes withheld from payment
|Possibility of delayed payments
|Can work on different projects at the same time
|Lack unemployment insurance benefits
|Can avail many deductions with tax payment
|Need to pay the taxes by themselves
|Remote working possible – can work from a beach or a hill station even
|Need to fund their own healthcare insurance
|Be own boss
|Lack workers’ compensation
Difference between independent contractors and self-employed
So, we are now familiar with independent contractors. There is always a question of independent contractors vs. self-employed. What is the difference?
Well, independent contractors do the project for a specific client. The demand for a particular work is generated by the client, which is then fulfilled by the professional.
This is different with self-employed contractors. They are not working for a particular client. Instead, they create a project or product which anyone can purchase.
In short, all independent contractors are self-employed, but all self-employed workers are not.
Hire independent contractors
Earlier, hiring independent contractors was a cumbersome task.
With Multiplier, employers can now quickly onboard skilled talent from anywhere without spending exorbitant costs. Generating agreements and onboarding contractors may take weeks, but it gets completed in a few clicks using Multiplier.
Multiplier’s SaaS platform can help you with:
- Independent contractor agreement generation
- Smooth, compliant onboarding process
- Easy Invoice generation
- Facilitate payments in the desired currency
- Cryptocurrency payment availability
Why break your head on independent contractors when you can focus on taking your business to the next level?
Get the best-skilled professionals onboard with Multiplier.
Wish to know more? Book a demo now!