An independent contractor is a natural person, business, or corporation that provides goods or services to another entity under terms specified in a contract or within a verbal agreement. Unlike an employee, an independent contractor does not work regularly for an employer but works as and when required, during which time she or he may be subject to the Law of Agency. Independent contractors are usually paid on a freelance basis. Contractors often work through a limited company, which they themselves own, or may work through an umbrella company.
In the United States, any company or organization engaged in a trade or business that pays more than $600 to an independent contractor in one year is required to report this to the Internal Revenue Service (IRS) as well as to the contractor, using Form 1099-MISC. This form is merely a report of monies paid; independent contractors do not have income taxes withheld from their pay as regular employees do. When computing taxable income on the federal income tax return, the independent contractor can deduct, from his gross income amount, the amount work related expenses, such as tools or safety gear needed for the work that were purchased by the contractor himself.
Independent Contractor versus Employee
Sometimes, it is not a straightforward matter to determine who is an independent contractor and who should be classified as an employee. To make a determination, the IRS advises taxpayers to look at three aspects of the employment arrangement: financial control, behavioral control, and relationship between the parties. While some independent contractors may work for a number of different organizations throughout the year, there are also many who retain independent contractor status even though they work for the same organization for the entire year.
Generally speaking, independent contractors retain control over their schedule and number of hours worked, jobs accepted, and performance of their job. This contrasts with the situation for regular employees, who usually work at the schedule required by the employer and whose performance is directly supervised by the employer. However many companies (particularly in the freight transport industry) specify the contractor's schedule, require purchase of vehicles from the company and prohibit work for other companies. The main reason for independent contractor status is to avoid providing health insurance, and to reduce tax payments.
Examples of occupations where independent contractor arrangements are typical:
- General Practitioner
- Boxer
- General contractor
- Mason
- Taxi cab or limosine driver
- Courier
- Telephone and live chat psychic
- Lawn care worker
- Entertainer
- Professional wrestler
- Professional athlete
- Engineering Consultant
- Newspaper Carrier
- Interpreter or Translator
- Doctor
- Lawyer
- Stockbroker
- Private military company
- Private security
- Private investigator
- Talent agent
- Author
- Dry cleaner
- Tradesman
- Accountant
- Market stall
- Barber or hair stylist
- Massage therapist
- Tutor
- Personal trainer
- Real estate agent
- Sales representative
The IRS definition of an independent contractor has not kept pace with the changing world of work. In the mid-1980s, almost everyone became an independent contractor. This was because the "psychological contract" - a non-verbal agreement between employers and employees to automatically renew work contracts - was formally dissolved. The Nashua Corporation was the first company to declare that employees could no longer expect to have a "job for life;" but many other organizations soon followed suit. Today, most will admit that their jobs exist only from contract to contract.
Pros and Cons
Life as an independent contractor has both benefits and hindrances.
Pros
- Since they are rarely tied to an employer, they are free to set their own rules of business, limited only by bargaining power.
- Since they usually develop a large network of clients, the loss of one or two often has a negligible effect.
- Many people simply like the idea of "being your own boss." Aside from materialistic benefits, many people simply enjoy not having to answer to a supervisor.
- As an artist/author of any tangible artwork, i.e. painting, sculpture, photograph, or written works, etc., you are entitled to copyright ownership only, and this is important, only if you created the work as an independent contractor. Otherwise, such artwork created while you were an employee belongs to the employer.
Cons
- Most independent contractors are usually also owners of a sole proprietorship, and as such, bear all the expenses of their product, which can be made up only by charging customers accordingly.
- Income taxes for independent contractors are drastically more complicated than of employees.
- There are several monetary incentives that are guaranteed to employees in the United States, but not independent contractors. Examples include worker's compensation and unemployment insurance.
An independent contractor in tort
The employer of an independent contractor is generally not held vicariously liable for the tortious acts and omissions of the contractor, because the control and supervision found in an employer-employee or Principal-Agent relationship is lacking. However, vicarious liability will be imposed in three circumstances:
- where the contractor injures an invitee to the real property of the employer,
- the contractor is involved in an ultra-hazardous activity (one likely to cause substantial injury, such as blasting with explosives), or
- the employer is estopped from denying liability because he has held out the independent contractor as if he were simply an employee or agent.
See also
- Subcontractor
- Performance bond
- General contractor
- Contingent Workforce
- Real estate trends
- Inside contracting
- Misclassification of employees as independent contractors
Notes
- ^ See generally 26 U.S.C. § 6041 and 26 C.F.R. sec. 1.6041-1.
- ^ Sample form 1099-MISC
- ^ IRS Frequently Asked Questions about form 1099-MISC
- ^ Hoag, B and Cary L Cooper, Managing Value-Based Organizations: It's Not What You Think. Edward Elgar: Cheltenham, UK and Northampton, MA. http://www.p-advantage.com
External links
- Independent Contractor Rights
- http:
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