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 an individual who works under contract for an individual or business as a non-employee. 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 work on their assigned tasks. 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. Any eligible expenses that an individual has incurred in relation to contracted work can be deducted from their taxable income, 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 (attached if the contractor receives other income, owes additional taxes, or qualifies for tax credits). Payments must be made either through quarterly payments or when annual tax returns are made. Any contractors who make more than one thousand dollars ($1,000) 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 treasury provides the online Electronic Federal Tax Payment System (EFTPS) to allows 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 payer a completed Form W-9 which provides their taxpayer identification number (usually the payer 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)

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