Independent Contractor

What is an independent contractor?

Under the Fair Labor Standards Act (FLSA), independent contractors are not considered "employees" even if they work for a company. This means they get more freedom over their schedule and ownership over their work, but they don’t receive federally mandated employee benefits like paid time off, insurance, or retirement. They also have to pay a self-employment tax to contribute to Social Security and Medicare taxes.

If a photographer, for example, chooses to work for a studio as an employee, they will have to work the hours their employer sets at the wage they set, but they may also receive a benefits package.

If they work as an independent contractor or business owner, they are considered self-employed. In this case, they will have more control over their schedule, pricing, and other business aspects. Payment would come directly from clients instead of an employer-issued paycheck, and they would be responsible for paying their quarterly federal income tax and health insurance. They will also need to track business expenses and other tax deductions along the way.

FAQs

Do independent contractors receive benefits?

While independent contractors get the benefit of being their own boss, they do not receive typical employee benefits ensured under the Fair Labor Standards Act, such as paid time off, sick leave, retirement, or insurance. 

Is an independent contractor the same as a freelancer?

For tax purposes, independent contractors and freelancers are the same thing. In the professional world, however, freelancers typically work on shorter, highly specialized projects, and independent contractors usually work on longer contracts that often resemble a full- or part-time position. 

Is an independent contractor a 1099 worker?

An independent contractor is a 1099 worker, meaning they are paid their full wages without tax withholdings. They have to set aside part of their wages to pay their taxes.   

What is the benefit of hiring an independent contractor?

Hiring independent contractors rather than a W2 employee can reduce a company’s tax obligations; however, it can also increase turnover and discourage company loyalty. It is important to have an independent contractor agreement to specify the terms of the employer-employee relationship.