Independent Contractor

What Is an Independent Contractor?

An independent contractor is a worker who is under contract to provide services for an organization. This worker is not a direct employee but may be a self-employed person or a business which acts as a third party.

The purpose of hiring an independent contractor vs. an employee is to receive a service on a temporary basis. This may also be done to avoid the added expenses (benefits, taxes, etc.) of hiring a regular employee.

What Are Examples of Independent Contractors?

An independent contractor can perform any kind of work for an organization. Some common professions for independent contractors include:

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What Is the Difference Between an Employee and an Independent Contractor?

An independent contractor is primarily in business for themselves, as opposed to an employee, who's economically dependent on their employer. The US Department of Labor uses the following criteria to determine if a contractor is economically independent:


A worker is typically classified as an employee of a business if they:

Independent Contractors

A person or entity may be considered an independent contractor if they:

What Are the Benefits of Being an Independent Contractor?

An independent contractor may be an individual who gets paid for freelance services. It may also be someone who owns an entity, such as a sole proprietorship or limited liability company (LLC). A few of the advantages of being an independent contractor include:

What Are the Drawbacks of Being an Independent Contractor?

Being an independent contractor can be highly beneficial for several individuals. But just like other professional choices, there are drawbacks to consider. Some of the disadvantages of being an independent contractor include:

How to File Taxes as an Independent Contractor

Annual net earnings of $400 or more are subject to self-employment tax. These taxes are reported to the IRS on either Form 1040 (US Individual Income Tax Return) or Schedule C Form 1040 (Profit or Loss From Business).

The self-employment tax rate for most independent contractors is 15.3%. Of this total, 12.4% is for Social Security and 2.9% is for Medicare. Tax rules apply even if the contracted worker is currently receiving Social Security and/or Medicare. Most independent workers use Schedule C to calculate net earnings from self-employment.

As of 2023, the first $160,200 of the contractor’s income (wages, tips, and net earnings) is subject to a combination of taxes. This may be the Social Security portion of the self-employment tax, Social Security tax, or Tier 1 of the railroad retirement tax. Additionally, all net earnings are subject to a similar combination of taxes: the 2.9% Medicare portion of the self-employment tax, Social Security tax, or railroad retirement tax.

If an independent contractor makes at least $160,200 and the Social Security tax or railroad retirement tax (or both) apply, they don’t need to pay the Social Security portion of the self-employment tax.

Please note: The IRS has special self-employment taxation rules for family caregivers. These apply to in-home aides for older individuals and people with disabilities.

Independent Contractor Taxes vs. Employee Taxes

Independent contractor taxes are handled differently than employee taxes. Businesses that employ contractors do not withhold state and federal taxes in their payments. Instead, independent contractors are responsible for paying the Self-Employment Contributions Act (SECA) tax on what they earn.

Estimated Tax Payments

This tax is usually estimated and paid quarterly to the IRS via Form 1040-ES. The IRS provides a Tax Withholding Estimator tool to help independent contractors gauge how much they’ll need to pay in taxes.

Estimated quarterly payments are required to be made by independent contractors who expect to owe more than $1,000 in taxes for the year.

Employers must file an independent contractor 1099-MISC form with the IRS for each person they’ve paid during the year. They should also ensure an independent contractor agreement is signed.

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