An HR Glossary for HR Terms

Glossary of Human Resources Management and Employee Benefit Terms

Independent Contractor

What Is an Independent Contractor?

An independent contractor is a worker who is under contract to provide services for an organization but who is not an employee there.

The purpose of hiring an independent contractor vs. an employee is to receive a service on a temporary basis and/or to avoid the added expenses (benefits, taxes, etc.) of hiring an 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?

When comparing independent contractors vs. employees, there are some differences between the two.

Employees:

Independent contractors:

What Are the Benefits of Being an Independent Contractor?

What Are the Drawbacks of Being an Independent Contractors?

How Do Independent Contractors Handle Taxes?

Self-employment earnings are subject to taxation if a contractor’s net earnings equal $400 or more in a year. These taxes are reported to the IRS on either Form 1040 (U.S. Individual Income Tax Return) or Schedule C Form 1040 (Profit or Loss From Business).

In 2020, the self-employment tax rate for most independent contractors is 15.3% (12.4% for social security and 2.9% for Medicare).

Independent contractor taxes are handled differently than employee taxes. Employers do not withhold state and federal taxes for contractors. Instead, independent contractors pay the Self-Employment Contributions Act (SECA) tax on what they earn.

This tax is usually estimated and paid quarterly to the IRS via Form 1040-ES. The IRS provides a Tax Withholding Estimator tool to give independent contractors an estimation of taxes they will need to pay.

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

An independent contractor 1099-MISC is the IRS form that an organization must have each contractor fill out after an independent contractor agreement is signed.