When you set up a business as an independent contractor, you become your own boss. Or do you? In many ways this is true, but you’re still working with other people, even if technically you’re on your own.

What exactly does it mean when someone hires you as an independent contractor? Is that the same as being a freelancer? If not, what’s the difference?

Read on to find out.

Independent contractor vs. employee

An independent contractor is, by definition, not an employee. The main difference is that employees get paid a regular wage, have taxes withheld from those wages, work part or full-time, and have their work and schedule dictated by the employer.

On the other hand, independent contractors are actually kind of the opposite – they tend to get paid for projects that they independently manage, they worry about their own taxes, and work when and where they want. Independent contractor status usually gives you a lot more autonomy over your time, work and money. You pretty much are your own boss. You are the one that sets your own hours, and makes your own tax payments.

It is also interesting to mention that if an employer treats an independent contractor as an employee, the IRS might penalize them for misclassification.

Can you tell an independent contractor when to work?

In the last paragraph, we have mentioned the penalization for misclassification. But what does this exactly mean? According to U.S. labor law, shortly, it means that you can’t dictate an independent contractor’s work arrangements.

If it happens that you need to train someone, as well as direct their tasks, set specific hours, and dictate how and when the work should be completed, the IRS is likely to see them as an employee, which independent contractors are not. If a staff member is classified as an employee, you need to withhold, deposit, report, and pay into their payroll taxes, including Social Security, and Medicare taxes. And if you don’t do this, well, then the IRS or Department of Labor might consider that “misclassification.”

The IRS says misclassification is a form of tax evasion and might come after you for the unpaid employer and employee portions of Social Security, and Medicare if they discover you’ve done it.

How much to charge clients

A business can pay a contractor by the hour or by the job, however, the two parties agree. So basically, unlike employee wages, you pay your independent contractors like you would any other kind of supplier, via your accounts payable system. Typically an independent contractor will first send you an invoice, which will specify certain payment terms.

The best and probably the easiest, most consistent way to do this is by having a pre-made contract which you can further use when someone hires you. If you are an independent contractor and you are not sure how to DIY contracts on your own, you can check out different templates on the following link. Depending on your accounts payable process, you might also send them a purchase order back to confirm the invoice before issuing the final payment.

Independent contractors and labor law

First of all, business licenses. There are different laws for what types of licenses or permits you may need to operate, depending on which state and industry you’re working in. Secondly, the Department of Labor ultimately relies on the Supreme Court for decisions regarding independent contractors. These decisions reveal that there is no one single rule or test for independent contractors or employees for purposes of the labor law.

The most important factors that impact independent contractors are the following:

  • The extent to which the services rendered are an integral part of the principal's business
  • The permanency of the relationship
  • The amount of the alleged contractor's investment in facilities and equipment
  • The alleged contractor's opportunities for profit and loss
  • The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor
  • The degree of independent business organization and operation

Paying taxes

As an independent contractor, you’ll have to set aside all of your self-employment taxes, Social Security, and Medicare contributions yourself. Also, you have to pay self-employment taxes to the IRS (the current rate is 15.3%—12.4% for social security and 2.9% for Medicare). To do that, you need to file Schedule SE. It is also important to mention that before you file Schedule SE, you’ll first have to calculate your total self-employment income (or loss) using Schedule C of Form 1040 (On Schedule C, total self-employment income is recorded on line 31.)

In the end, if you are already doing everything right legally, there are no other rulebooks on how to do your independent work. You are in charge! We hope that we have covered all the important things that will prove to be useful for you in the future.

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