An independent contractor agreement is a contract between an independent contractor and the business or individual needing their services. It explains the duties of both parties involved. The agreement also includes a detailed description of the job that should be done, how it should be done, the payment and when it will be made, and other clauses such as a confidentiality clause.
This legal document details an agreement between an individual or company and an independent or freelance worker. This is an important agreement for both parties. The agreement should outline the work to be done and what kind of payments will be rendered for services.
This agreement requires personal information from both parties, such as names, addresses, and contact information. The agreement should also include detailed information about the services to be provided and how the contractor will be paid for work. Other information can be included as needed, such as confidentiality clauses or length of employment.
The agreement should include the entire agreement between the parties and should be signed and dated by both parties. The contract should be kept in both the employer's and the contractor's records for future reference. A witness may also be needed, or legal counsel can look over the agreement.
An independent contractor agreement is also known as a: Consulting Agreement, Consulting Services Agreement, General Contractor Agreement, Freelance Contract, Freelancer Contractor Agreement, Subcontractor Agreement.
You should use this agreement to protect your business interests. For business owners, a contractor agreement details the work that will be completed, when it should be done, and how much you will pay. The agreement will also shield you from liability issues. This agreement can protect your assets and any trade secret or other confidential information.
If you are an independent contractor, this agreement will protect your interests if you provide work and are not paid. If you provide a contract for your clients you will appear professional and organized.
Sample independent contractor agreements are available online. Using an independent contractor agreement template will save you time over creating an agreement from scratch.
You should use this agreement if you are an independent or freelance contractor that needs to provide a contract for your client. If you are a customer or client, you can use this agreement if you are working with a contractor and you want your arrangement detailed in a written contract.
Businesses have an obligation to properly classify their workers as independent contractors or employees. Employers must pay a portion of payroll taxes on employees. Independent contractors are in charge of their own tax filings.
The United States Department of Labor (DOL) and the Internal Revenue Service (IRS) conduct audits of companies to determine if employees have been misclassified as contractors. The penalties for an improper classification will depend on whether the misclassification was unintentional, intentional, or fraudulent.
Penalties for wrongly classifying employees as independent contractors include:
$50 fine for each unfiled W-2
Penalties for failure to withhold income taxes - 1.5% of paid wages, 40% of FICA taxes (Social Security and Medicare) not taken from employee wages, 100% of matching FICA taxes, plus interest
Failure-to-pay tax penalty - between 0.5% and 25% of the employer’s taxes, depends on how long the misclassification has occurred
The IRS has the right to impose additional fines and penalties if they suspect fraud or intentional misclassification of employees. An employer can be subjected to penalties that include 20% of all wages paid, plus 100% of Social Security and Medicare taxes (both the employee’s and the employer’s share).
Criminal penalties of $1,000 per misclassified worker and one year in prison may also apply. The person who is responsible for withholding taxes could also be held personally liable for any uncollected tax.
There are many ways to differentiate an employee from an independent contractor.
Independent Contractors
May have multiple customers
Send invoices to their customers
Use their own tools or equipment
Invest in their own businesses
Works on a fixed-term basis
May hire their own employees or subcontractors
Customers have little oversight over the work provided
Sign an Independent Contractor Agreement
Do not receive benefits from clients
Generally work out of their own offices
May not join a union
Not entitled to overtime pay
Employees
Employer pays them a set wage
Employer controls how, where, and when they work
Sign an Employment Contract
Typically receive benefits such as medical insurance coverage, vacation, retirement plans, workers' compensation
Typically receive training
May join or form a union
Protected by federal and state wage laws and overtime rules
If you’re trying to hire a freelancer, there are numerous online resources and staffing agencies that can help you find one. The numerous freelance websites that are available typically have portfolios and profiles where you can search for freelancers that meet your specifications and view a freelancer’s past work and reviews from past clients.
If you are unable to meet with your freelancer in person, you can set up a phone call or video call for an interview. If you are looking for work on a large project, you can test the freelancer’s skills by offering them a small paid project first.
There are many advantages to hiring independent contractors instead of a regular employee:
You don’t have to pay for their health insurance, vacation pay, unemployment compensation, or other benefits
You don’t have to pay their federal taxes
You only have to pay them for the work that they complete
You don’t have to manage their schedule
You don’t have to pay for their training
Less paperwork
If you hire an independent contractor, you may be concerned with protecting any classified or proprietary information that you share with the contractor.
You can protect yourself by including special terms in your independent contractor agreement. These terms would constitute a confidentiality agreement. If you are concerned with conflicts of interest or the contractor soliciting the client, you can also include terms about non-solicitation and non-competition. If your contractor does not comply with these terms, you will have a claim for breach of contract and should seek legal advice.
In the United States, federal law is the governing law for copyrights. According to the U.S. Copyright Act, the person who commissions a “work for hire” is the initial owner of the copyright. A “work for hire” includes creative work that is developed by an independent contractor in certain circumstances. This means that if you commission an independent contractor to create work product for you, you will often own the copyright.
However, the parties can agree by contract to alter the ownership of the copyright. The agreement can be drafted so that the independent contractor retains ownership of the intellectual property by the company has a license to use the work product.
An independent contractor has their own business and offers its services for hire. Unlike an employee, an independent contractor is self-employed and must, on their own, pay self-employment tax for Social Security and Medicare, and income taxes. The payer/hiring company is not responsible for any withholding.
An independent contractor is at liberty to determine how the independent contractor works -- how the work will be performed, when it will be performed, and, in certain situations, where it will be performed. If, however, the payer/hiring company will determine when the individual must work and has the ultimate say regarding how to do the work and when it must be done, the person should probably be considered an employee.
An independent contractor agreement is a legally binding, written agreement that details the contractor relationship -- the business relationship between a payer/hiring company and an independent contractor; it is a crucial document for tax purposes. The provisions of this agreement with an independent contractor should include the following sections:
Scope of Work: This section should include a description of what each party intends to do, including the service to be provided, the conditions under which and date when the service will be provided, and the details of payment for the service. The nature of the work should also be detailed -- what the independent contractor will actually do; if the independent contractor will be producing a product/products, how and when the deliverables will be made available to the payer/hiring company should be noted. This section is evidence that the agreement does not form a joint venture or partnership.
Independent Contractor Status: This section should state that the worker is an independent contractor, as opposed to an employee. It should also state that the independent contractor has the right to provide services for other parties, unless those services are in conflict or compete with the work being done for the payer/hiring company (see below) and if the independent contractor may hire other parties (subcontractors and/or employees) to do part or all of the work in question.
Compensation/How the Independent Contractor will be Paid: This section should state that the payments made to the independent contractor do not include withholding for income tax or payroll taxes (including FICA taxes for Social Security and Medicare) and that no federal unemployment compensation payments or workers compensation fund payments will be paid by the payer/hiring company on behalf of the independent contractor. Some states, however, do require unemployment compensation or workers compensation for independent contractors. This section should also specify the amount the independent contractor will be paid and at what intervals.
Responsibility for Expenses: This section should describe the party responsible for certain expenses. The independent contractor is generally responsible for all expenses, including business travel costs, supplies/tools, licenses, fees, and permits; phone/internet expenses, and payments to their subcontractors and/or employees, if such parties are permitted to help with the work.
Non-Eligibility for Benefits: This section should state that the independent contractor is aware that they are not eligible for or entitled to pension/retirement benefits, health insurance, vacation/holiday pay, sick pay, or other benefits generally provided to an employee.
Liability Insurance: This section should state that the payer/hiring company will not provide liability insurance of any kind for the independent contractor; the independent contractor will not be covered under the company's liability insurance policy and is required to have their own liability insurance.
Effective Date of the Agreement: This section should state the date when the agreement and the work in question will begin -- the start date of the business/contractor relationship.
Termination of the Agreement: This section should state if termination of the agreement will occur upon completion of the deliverables or the other conditions for termination, including breach of confidentiality. This section should also state that either party can terminate the agreement with or without notice, depending on the circumstances involved.
Indemnification/Resolution of Disputes: This section covers the payer's/hiring company's liability for any fees, costs, and judgments against the contractor. This section should state that the independent contractor agrees to indemnify the payer/hiring company for all losses and claims that result from the independent contractor's actions. Many agreements also include a mandatory arbitration clause that requires all contractual disputes to be resolved by arbitration instead of litigation.
Severability: This section should state that if any provisions of the agreement are deemed unenforceable or invalid, the rest of the agreement will not be affected and will remain intact.
Governing law/Applicable Laws: This section states the laws (state or county) that will govern the agreement should legal issues arise during the term of the agreement.
Waiver: This section should state the release of any rights in the business relationship between the payer/hiring company and the independent contractor.
Warranties/Professional Capacity: This section should state that the independent contractor agrees that they have the capacity, methods, and equipment that warranties they will fulfill their obligations under the agreement.
There are also restrictive covenants that can be included in the written independent contractor agreement, depending on the work involved:
Non-Compete: A non-compete clause is a legally binding provision that prohibits an independent contractor from working with the payer's/hiring company's competitor during the period of the independent contractor agreement (and perhaps for a period of time after the agreement terminates) and/or prohibits an independent contractor from starting a competing business within a certain period of time and location.
Confidentiality/Non-Disclosure: This section defines any confidential information, including patent rights, copyrights, trade secrets, marketing plans, and customer databases, and states that the independent contractor agrees to not disclose this information to any outside (third) parties.
Non-solicitation: This clause prohibits the independent contractor from soliciting customers or employees of the payer/hiring company.
Some states do not permit restrictive covenants. A payer/hiring company should consult an attorney/law firm regarding the inclusion of such provisions in their written agreement with an independent contractor.
Sources:
If you hire an independent contractor, you will be required to fill out a Form 1099-NEC if you pay them more than $600 within a year. The 1099-NEC is needed to report how much income an independent contractor earns in a year. You must send all completed 1099 forms to the IRS before January 31 of the following year.
You must also have the independent contractor complete a W-9. The W-9 is needed to collect an independent contractor’s contact information and tax information.
The IRS will assume that a person is an employee unless you can prove otherwise. If you are ever audited by the IRS, you will need to show them the freelance contract, all past invoices, and proof of payments to prove independent contractor status - so make sure to save all of this information. If you are not sure if a worker would be considered an employee or contractor, you can request that the IRS makes a contractor status determination for you by filing a Form SS-8.
All important IRS forms and instructions on filling them out can be downloaded from the IRS website.
