Independent contractors are self-employed workers who can pick and choose which projects they want to work on. Some take on multiple short-term jobs, while others opt for longer-term work arrangements with a small number of clients. Many independent contractors are paid by the hour, but per-project compensation is also common.
Among those that work with a single client, some independent contractors will actually come to the company’s office, work side-by-side with employees, and even have a workstation. They are also more likely to be added to a company’s internal communication platforms, such as Slack.
Common examples of independent contractors are doctors, dentists, contractors, accountants, and real estate agents.
As the gig economy rises and remote work becomes more mainstream, the number of independent contracts is steadily rising. Almost one-third of workers have worked for themselves, while 14% primarily work as an independent contractor.
This is part of an extensive series of guides about workforce management.
Independent Contractor vs. Employee: What Is the Difference?
When a business hires an employee, they put them on the company payroll. They will withhold employment taxes, social security, contributions for Medicaid, and more. The business is also responsible for providing benefits such as sick pay, vacation days, and parental leave. The company has strict rules to keep around elements of work such as overtime, working hours, and working conditions.
In contrast, a business doesn’t need to consider any of these rights when they are hiring an independent contractor. An independent contractor is paid their full wage, and is responsible for filing and paying their own taxes and insurance contributions. They need to factor in how they will cover vacation or sick days and not be left out of pocket.
Independent contractors also have a lot more control over how they work than employees do. An employment contract may state that employees need to work 40 hours a week for a set salary between a certain period of time, in a specific office. An independent contractor sets their own hours, working location, and payment, and has the freedom to change these at any time. It’s up to the business to agree to those terms working for them, rather than the other way around.
Differences Between Independent Contractors, Freelancers and Gig Workers
Freelancers, independent contractors, and gig workers are all types of self-employed workers, which means all of them have to pay self-employment taxes (more on that below), and none receive employee benefits or protections.
Independent Contractors vs. Freelancers
Like independent contractors, freelancers determine their own rates and specify if they will be paid by the hour or per job.
In recent years, freelancing gained greater popularity when the “digital nomad” concept was born, in which individuals performed their work while traveling or living in different parts of the world.
Another difference between freelancers and independent contractors is the duration of work. While both are considered temporary arrangements, freelance work tends to be shorter in scope. Because of this, it’s more common for freelancers to work with multiple companies at the same time.
Independent Contractors vs. Gig Workers
Although gig workers will be legally classified as independent contractors, they get their own category here because the nature of their work is different from traditional contractors. Gig workers perform temporary, very short-term jobs — often procured through a consumer-facing app — to provide on-demand services. The most common types of gig workers are ride-hailing app drivers (i.e. Uber and Lyft), food delivery drivers, and other services that can be ordered online, such as furniture assembly via Taskrabbit.
4 benefits of hiring independent contractors
Competitive businesses have already identified the value of building up a strong alternative workforce. Here are four benefits of working with independent contractors.
#1 Access to Top-Tier Talent
Many of the most qualified and experienced workers opt to work for themselves to gain the benefit of autonomy and flexibility in their work. By supplementing your workforce with independent contractors, you’ll be positioned to fill crucial skills gaps and tap high-demand industry expertise.
#2 Increased Agility
A robust alternative workforce empowers you to be more agile, nimble, and adaptable amid unpredictable markets and shifting regulations. Because independent contractors work on a temporary basis, your relationship with them is more flexible. This allows you to change business priorities, build new strategies, and connect with the right talent fast.
#3 Quicker Onboarding
Onboarding a full-time employee can take weeks or even months. When you have a project that you want to dive into fast, getting an independent contractor up to speed is much quicker. With them, you can focus on the project itself and ignore the organizational and cultural components of onboarding.
Occasionally, a company will want to include vetting and background checks in the onboarding process for sensitive roles.
#4 Cost Savings
Even though some independent contractors require hefty payments, there are far lower overhead costs compared to hiring full-time employees. With self-employed workers, employers are not required to subsidize health plans, contribute to unemployment or retirement, provide minimum wage, or offer paid time off. There is also a lot of flexibility when it comes to how to pay contractors.
4 disadvantages of working with independent contractors
There are also drawbacks to be aware of when working with independent contractors.
#1: More Frequent Talent Hunt
Because an independent contractor’s tenure will be shorter than a full-time employee, backfilling them requires a more frequent talent search, which can be tedious and time-consuming. With so many freelance marketplaces today, it can feel impossible for hiring managers to identify and vet the best talent for a job.
#2: Commitment Issues
It is in the best interests of independent contractors to select the jobs that will pay the most, offer the most interesting work, and satisfy their other requirements. That means they move easily from one job to another with minimal commitment.
#3: Lack of Control Over the Work
While employees can dictate exactly how employees do their work, they don’t have this oversight with self-employed workers. Payers need to be comfortable with a more hands-off work relationship when working with independent contractors. In many cases, it’s up to the employer to ensure the tools and processes of the freelancers are meeting with the different regulations the company must meet.
In some cases the company also must ensure the freelancer have a third party insurance and get an insurance for them, to protect their customers and the company due to the inherent lack of control.
#4: Risk of Misclassification
Misclassifying independent contractors can lead to costly consequences from the IRS, including penalties and back taxes. Unless you have a system in place to guarantee classification, working with independent contractors introduces your company to added risk.
What are the tax requirements for working with independent contractors?
In the US, each individual’s tax requirements are based on how they are classified: self-employed or employed. According to the IRS, a person is self-employed if the payer “has the right to control or direct only the result of the world and not what will be done and how it will be done.”
Independent contractors are required to file an annual return and pay estimated tax quarterly.
When income tax season arrives, American paying companies need to send independent contractors a Form 1099-MISC, which reports all of the income paid to the worker in the previous calendar year. This form takes the place of a W2.
If an independent contractor’s net earnings were $400 or more, they will need to file a tax return with the IRS on a Form 1040. They will also file a Schedule C to calculate net income or loss for their business.
All self-employed workers are required to pay Self Employment Tax, which pays into Social Security and Medicare.
How Can You Avoid Misclassifying Independent Contractors?
Misclassifying an employee as an independent contractor can lead to significant legal and financial implications. Therefore, it’s crucial to correctly classify your workers.
Here are some tips to avoid misclassification:
- Understand the legal definitions: The first step to avoid misclassification is to understand the legal definitions of an employee and an independent contractor. Various laws provide different definitions, so it’s important to familiarize yourself with the laws in your jurisdiction.
- Examine the level of control: One of the key factors that distinguish an employee from an independent contractor is the level of control the employer has over the worker. If you control or have the right to control what the worker does and how the worker does his or her job, the worker is most likely an employee.
- Consider the financial aspects: Independent contractors are more likely to incur unreimbursed business expenses, have a significant investment in their business, and are more likely to make their services available to other businesses.
Learn more in our detailed guide to employee misclassification.
What are Typical Examples of Independent Contractors?
Best PraGraphic Designers and Web Developers
Graphic designers and web developers play a crucial role in creating visually appealing and functional websites, logos, and other digital assets. These professionals often work as independent contractors, providing their services to clients on a project-by-project basis.
As independent contractors, graphic designers and web developers set their own rates and timelines, and often work remotely. These professionals need to constantly stay updated with the latest design trends and technological advancements to stay competitive in the market.
Freelance Writers and Editors
Many companies prefer to hire freelance writers and editors on a project basis rather than employing them full-time. Freelance writers might create a range of content, from blog articles and white papers to social media posts and marketing copy. Editors, on the other hand, may provide services like proofreading, content editing, and copyediting.
IT professionals such as cloud engineers, networking specialists, and cybersecurity professionals often provide their services on a contract basis. They might be hired to manage a company’s IT infrastructure, deploy a technical solution, or provide strategic IT consulting.
Consultants are experts in a specific field who provide professional advice to organizations. They can work in various sectors, including management, finance, marketing, and human resources. Consultants often work as independent contractors, offering their expertise to help organizations solve problems, improve performance, or achieve specific goals.
Best Practices for Working with Independent Contractors
One of the most crucial aspects of working with an independent contractor is clear communication. This begins with a comprehensive understanding of the task at hand, including the scope of the work, the desired outcome, and the timeline for completion. It’s essential to communicate these details explicitly and ensure that both parties are on the same page.
Regular check-ins and updates are also a vital part of clear communication. As a client, you need to be aware of the progress and address any issues promptly. This doesn’t mean micromanaging the independent contractor, but rather maintaining an open line of communication and encouraging them to ask questions and provide feedback.
Use a Written Contract
A written contract is a must when working with an independent contractor. This document should detail all aspects of the agreement, including the scope of work, timelines, payment terms, and any other relevant details. It serves as a legal document that can be referred to in case of any disputes or misunderstandings.
The contract should also define the relationship between the parties, clarifying that the independent contractor is not an employee and is responsible for their own business expenses and taxes. This is important to avoid any potential legal issues regarding employee classification.
Prompt payment is a sign of respect and professionalism towards the independent contractor. It shows that you value their work and are committed to maintaining a positive business relationship.
Negotiate the payment terms in advance and include them in the written contract. These should specify the amount to be paid, the payment schedule, and the method of payment. Always pay on time according to these terms. If there are any issues that may delay payment, communicate this to the independent contractor as soon as possible.
Depending on the nature of the work, insurance may be a critical consideration when working with an independent contractor. This could include professional liability insurance, workers’ compensation insurance, or other types of coverage.
In many cases, independent contractors should carry their own insurance. However, you should check your own business insurance policies to see if they provide coverage for any potential claims related to the work of independent contractors. If not, you might need to consider obtaining additional insurance.
When working with an independent contractor, you might need to share sensitive business information with them. This could include trade secrets, customer data, or other confidential information. To protect this information, it’s advisable to use a confidentiality or non-disclosure agreement.
This agreement should detail what information is considered confidential, how it can be used, and the consequences of unauthorized disclosure. It should also specify how long the confidentiality obligations last, typically even after the termination of the contract.
The Role of Independent Contractors in the Future of Business
In order to determine which type of worker is best for a given situation, businesses must weigh the pros and cons of different types of workers. It is clear, however, that building a robust alternative workforce is an advantage for businesses that want to increase agility and get an edge over their competitors.
Having a strong network of independent contractors as a company grows will give them a decisive edge in a competitive, unpredictable, and fast-paced market.
See Additional Guides on Key Workforce Management Topics
Together with our content partners, we have authored in-depth guides on several other topics that can also be useful as you explore the world of workforce management.
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