An independent contractor agreement is between a client and a company that makes a promise to produce services in exchange for payment. The client will have no responsibility for employees, subcontractors, or personnel in connection with the services provided. Their only obligation will be to pay the independent contractor with no liability if anyone should get injured during the performance of the work.

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What is an Independent Contractor?

An independent contractor is a self-employed professional who works under contract for an individual or business, their client. Unlike an employee, an independent contractor cannot be managed by the employer except within the context of their agreement. In other words, the contractor makes their own hours and decides how to carry out their services. Due to their independent status, contractors must pay their own taxes for Social Security and Medicare.

IRS Definition

In general, if an individual is subject to the control or direction of another merely as to the result to be accomplished by the work and not as to the means and methods for accomplishing the result, he is an independent contractor.

Source: Section 31.3121(d)-1)(c)(2)

IRS Tax Forms

  • IRS Form W-9 – Must be completed by an independent contractor before any services are provided or an agreement is made. This form is not filed with the IRS but is required to be held by the payer of services for at least four (4) years.
  • IRS Form 1099 – To be filed with the IRS at the end of the year if the payer paid an independent contractor $600 or more. Must be filed by January 31st following the calendar year.

How to Become an Independent Contractor

Becoming an independent contractor allows a person to be self-employed and start their own business. An individual may work as a sole proprietor by using their personal name to conduct business activity. Although, for tax reasons, it is highly recommended for an independent contractor to incorporate.

Step 1 – Search a Business Name

Lookup a business name you wish to incorporate by entering in your Secretary of State Database. After entering the selected name, if there are no results then usually the name is available. To confirm a name is available, an individual may file a Name Reservation Request and reserve the name from 30 to 120 days.

Step 2 – Conduct a Trademark Search

Use the USPTO in order to conduct a trademark search of your business name. For example, if you happen to choose the name ‘Frank’s Hot Sauce’ it could be a trademarked name. If there is no trademark for the business use then the incorporation can proceed.

Step 3 – Choose Type of Entity

Select the type of entity that best fits your needs. Due to every individual having their own financial needs it’s recommended to meet with an accountant before ultimately deciding which entity is best.

  • LLC – The owners, known as “members”, own as a percentage (%) of the company, not shares. An LLC can choose to be taxed either as an S-Corp or C-Corp.
  • Corporation
    • C-Corp – Business is taxed at the corporate level of *21% (*Public Law No: 115-97)
    • S-Corp – All profits pass-through to the owners and taxed at their personal income rate.
  • Partnership – Creditors may go after the partners on a personal basis. Meaning if the partnership owes debts a partner’s personal vehicle and home are subject to seizure.
  • Sole Proprietorship – Going into business under your personal name.

Step 4 – Write Agreements

If an LLC, Corporation, or Partnership was created there will be additional documentation in the form of the following to detail ownership, individual roles, and any other rules for the business:

  • Corporation – Corporate bylaws are required to state when annual meetings are to occur along with other administrative items.
  • LLC – An operating agreement is needed to outline the day-to-day functions of the company and ownership percentage.
  • Partnership – A partnership agreement states the ownership percentage, roles of each partner, partnership purpose and how it will operate on a day-to-day basis.

Step 5 – Get an EIN

Every individual and business in the United States are required to either have a Social Security Number (SSN) or an Employment Identification Number (EIN) to conduct financial transactions. Unlike an SSN that an individual gets upon birth or citizenship, an EIN can be obtained by using the IRS Website.

The process is free and takes about 10-15 minutes by answering a series of questions.

How Does an Independent Contractor Pay Taxes?

An independent contractor pays taxes quarterly or annually for federal income tax, state income tax, and self-employment tax on all net earnings after deductions. Deductions can be defined as any eligible expenses that an individual has incurred in relation to contracted work such as space rental, equipment purchases, and transportation costs.

Annual tax returns are filed with the IRS using Form 1040, along with any appropriate schedules (there are six (6) different schedules which must be attached if the contractor receives other income, owes additional taxes, or qualifies for tax credits). Depending on how much an individual earns as an independent contractor, tax payments must be made either through quarterly payments or when annual tax returns are due. Any contractors who expect to owe more than one thousand dollars ($1,000) in taxes are required to make quarterly estimated tax payments (estimated tax can be calculated using Form 1040-ES). Annual tax returns are due on April 15th (or October 15th if filed on extension). In the event that an independent contractor does not pay their requisite taxes throughout the year, they will be financially penalized by the IRS which will appear as a deduction on their tax return. The United States Department of the Treasury provides the online Electronic Federal Tax Payment System (EFTPS) to allow individuals to conveniently file their taxes from the home or office.

In addition to the IRS forms that an independent contractor must file, their clients and employers are required to submit information regarding their transactions as well. Any individuals or entities who have paid the independent contractor more than six hundred dollars ($600) within a tax year are required to file Form 1099 which details the transaction, as well as both individuals’ taxpayer information. In order to file Form 1099, the contractor must give the client a completed Form W-9 which provides their taxpayer identification number (usually the client will give the contractor this form as a request for information). If an independent contractor works for an employer in addition to running their own business, their employer must file Form W-2 (for wages and taxes) on their behalf.

How to Write an Independent Contractor Agreement

Download: Adobe PDF, Microsoft Word (.docx)

Step 1 – Acquire The Independent Contractor Agreement On This Page For Your Use

The two text links preceding the heading above will both deliver access to the agreement required to solidify the terms and conditions of a contracted service. If desired, you may view this agreement in the preview at the top of this page. The preview area also provides the means to obtain this agreement as a “PDF” or “Word” document.

 

2 – Supplement The Summary Introduction With Material That Will Apply To This Agreement

The beginning of this contract shall present two basic statements that will sum up its purpose. The first four empty lines of this statement expect the full name of the Client then his or her mailing address. Your first entry must be the Client’s name on the first of these lines.  The three spaces after “…Mailing Address Of” request an entry of the building number, street name, and suite number while the next two available spaces, provide the city and state to complete this address. This statement continues with a similar request regarding the Independent Contractor. Place his or her name on the empty line placed just before the term “…With A Principal Place Of Business.” The three spaces following this wording expect a presentation of the Independent Contractor’s office address. This address should be reported across the three empty lines presented so you must enter its street address on the one line, the city of this address on the line following “…City Of” in the next space, then the office address’ state on the last line.  The second statement of the introduction will conclude this basic summary by naming its effective date. Refer to your references then input the desired effective date using the spaces available after the term “…Shall Be Made Effective On The” 

 

Step 3 – Describe The Contracted Services This Agreement Is Focused On

Notice the title “The Parties Agree…” This statement will signal the start of the contract items or articles that define the agreement both these parties are entering. In “1. Services To Be Performed” you must give a comprehensive description of the job or project the Independent Contractor is being hired for. This section will define the Independent Contractor’s responsibilities to the Client project so if more room is required, you should continue either on an attachment or you may insert more lines. 

 

Step 4 – Discuss The Client Payment That Will Be Submitted To The Contractor

The second item (“2. Payment”) will detail the Client’s obligation to compensate the Independent Contractor for the job we have defined. Use the blank lines in the second item to record the amount of money that will be paid to the Independent Contractor and how it will be paid. Notice the remainder of this article will set some terms of payment that both the Client and the Independent Contractor must adhere to. 

 

Step 5 – Indicate Which Party Will Be Responsible For The Project Expenses

You must choose one of two statements in “3. Expenses” to name the Party who shall assume the financial cost(s) that completing this job or project will demand. If the Independent Contractor shall pay for all expenses required by this job or this project then mark the checkbox corresponding to the statement “Contractor Shall Be Responsible…”  Mark the second checkbox if the “Client Shall Reimburse Contractor Within (30) Days…” after the Contractor has submitted the reimbursement paperwork defined. This choice will only obligate the Client to reimburse the Independent Contractor for items that are listed within its contents. An area of a couple of blank lines has been included so you may list reimbursable expenses accordingly. 

 

Step 6 – Define The Agreed-Upon Status Of The Contractor

Naturally, certain aspects of any job will entail rules that apply both onsite and offsite to both of these entities regarding their status with one another. In “5. Independent Contractor Status,” you will be required to review a list of descriptions. After reading through this material, you will need to check each box that corresponds to an applicable statement. Any statement you do not select will not apply to this list. You may select as many of these items as necessary. If the Independent Contractor is not exclusively employed by the Client during this agreement and may take on other Clients, then mark the first checkbox. If the Contractor will remain in control of how the tasks required in the first item will be performed (i.e. methods, work shifts, project scheduling) then mark the second statement. The Contractor can retain the right to hire additional personnel if he or she deems it necessary for the completion of the services being commissioned if you mark the second checkbox.
In some cases, a Client may require his or her Employees to wear uniforms. If the Contractor and his or her staff will be exempt from any such rule even though it is standard for the Client’s Employees then select the third statement. If this agreement is intended to deliver exclusive rights to perform the job and the Client is forbidden from seeking outside help of any kind, then mark the checkbox (corresponding to the words “The Services Required By This Agreement…”).   The second to last statement of this list will exclude the Independent Contractor (and his or her Employees) from being required to obtain training from the Client to engage in the “Performance of The Services Required By This Agreement.”    If the Client will not require the Independent Contractor (and his or her Employees) to “Devote Full Time To The Performance Of The Services” then mark the last checkbox statement. 

 

Step 7 – Identify The Insurance Requirements Of This Agreement

The item designated as “11. Insurance” will focus on defining what insurance requirements the Independent Contractor must fulfill to maintain this agreement. To supply this definition you may check either, both, or neither of the checkbox statements in this item.  If “Automobile Liability Insurance” must be maintained by the Contractor for any vehicle (whether owned by the Contractor or not) required to reach or perform this job then mark the first checkbox. This statement requires that you define the minimum “Combined Single Limit Per Occurance For Bodily Injury And Property Damage” on the blank line provided. If the Independent Contractor must hold “Comprehensive Or Commercial General Liability Insurance” then mark the second checkbox and record the minimum combined single limit amount listed on the policy that he or she must keep active. 

 

Step 8 – Record The Notice Required From A Terminating Party

Eventually, most agreements will terminate as a result of their completion or, as in some cases, some unforeseen factor. Regardless of the cause of the termination, the method by which this occurs must be defined beforehand. Section “14. Terminating The Agreement” will handle this task with the necessary wording but requires that you report the number of days that the Party terminating this agreement must give to the other one as a notice on the blank space presented in this item. 

 

Step 9 – Show How Disputes Will Be Resolved

The article titled “17. Resolving Disputes” seeks to name the required course of action to take should one party violate this agreement and remain noncompliant or should a disagreement that cannot be easily solved arise. One of the two statements in this item must be selected and completed to determine what the offended Party may do when faced with either situation. Select the first checkbox in this section if these parties will be required to settle a disagreement or violation regarding this contract in court. You must also name the State Court system where this matter must be brought on the first blank line and the County of jurisdiction.  If the Independent Contractor and Client will be obligated to seek mediation and then arbitration to resolve a contract disagreement or violation then choose the second statement. After marking its checkbox, make sure to supply the county and state where mediation must take place on the first two blank lines then the county and state where arbitration should take place on the third and fourth lines (respectively). 

 

Step 10 – Supply The Additional Confidentiality Terms As Needed

As with many businesses, a security concern of letting an outside party be privy to the internal workings of a Company will have to be addressed. To this end, the wording necessary to safeguard such information is presented in “18. Confidentiality.” This language should not be changed unless it is done by a practicing attorney in the state where this agreement applies. A blank line has been supplied at the end of this article so that you may include any additional terms, definitions, or conditions that should be included when solidifying the confidentiality privileges of the Client in this contract. 

 

Step 11 – Document The Delegation Rights Of These Parties

At times a delegation of duties regarding the project or job may need to be dispensed by the Contractor or Client. In addition to the status defined in the fifth item, article “21. Assignment And Delegation” will present you with two choices that will enable some further definition of this particular right. If both these parties will be permitted to assign tasks concerning the contracted services then mark the checkbox attached to the “Either Contractor Or Client” statement.  If the Independent Contractor must obtain written approval from the Client in order to assign project tasks or subcontract the services required, then you must mark the second checkbox. 

 

Step 12 – Report The State Of Law

Earlier, you were asked to supply a county and state for a dispute (see section 17). In “22. Applicable Law” we will formally declare the jurisdiction that governs the contents of this paperwork, its execution, and its enforcement. Place the name of this state on the blank line. 

 

Step 13 – Name Any And All Attachments To This Paperwork

This agreement can only hold the Independent Contractor and Client responsible for the obligations defined within its contents. Thus we must verify exactly what those contents are. If there will be no attachments with additional terms or conditions then mark the first checkbox in “23. Attachments.”  If any attachments are meant to be a part of this agreement (thereby obligating each party to its contents), then you must mark the second checkbox in this section and list each one by title on the blank lines provided.

 

Step 14 – Present The Signature Of The CLient And The Contractor

The final item, “24. Signature Area,” is formatted so that the Client can enter this agreement officially as well as the Independent Contractor. The Client must sign his or her name on the line attached to the label “Client’s Signature.”  This Client action must be dated so the Client must enter the current “Date” on the adjacent line. Directly below these items, the line labeled as “Print Name” will request the Client complete this section by printing his or her name on it.  The Independent Contractor’s signature area will also need to be completed. Only the Independent Contractor can sign his or her name on the “Contractor’s Signature” line and must do so to enter this contract.  After signing his or her name the Independent Contractor must present the current “Date” on the line next to it, then print his or her name on the line below this.    The Independent Contractor will need to provide his or her company information. The “Name Of Company,” “Title Of Signer,” and “Taxpayer ID Number (EIN)” lines require the legal name of the Independent Contractor’s business entity, the exact position the Signature Party holds with the Independent Contractor Company, and the Entity Identification Number assigned to this business respectively.