10 Facts You Should Know about Independent Contractors

Contract Workers Vs. Employees, Paying Contractors, Forms and Agreements

Graphic Designer At Work.
Contract Workers Vs. Employees, Paying Contractors, Forms and Agreements. vgajic / Getty Images

1. Independent Contractor status is the exception, not the rule.

That is, the IRS assumes that a worker is an employee unless you can prove otherwise. The burden of proof is on you, not the IRS, to prove independent contractor status.

2. The IRS looks at 3 major factors in determining worker status.

  • Financial control: Are the business aspects of the worker's job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
  • Behavioral control: Does the company control or have the right to control what the worker does and how the worker does his or her job?
  • Nature of the relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

Usually, no one factor is determining of status; the IRS looks at the entirety of the factors.

3. New hire paperwork for independent contractors is simple.

The only new hire paperwork needed for an independent contractor:

  • Form W-9, to provide a taxpayer identification number. If you have a valid taxpayer ID number for a contractor, you do not have to withhold federal income taxes from payments to the contractor. If you do not have a valid taxpayer ID number, you must withhold federal income taxes. This is called backup withholding.
  • A copy of the independent contractor's resume or professional qualifications
  • A copy of the contract.

Keep the items above in a file for the contract worker, in case of audit.

4. Paying an independent contractor is also fairly simple.

You can pay by the hour or by the job, however you and the contractor agree. In most situations, no income tax is withheld, no FICA taxes (Social Security and Medicare) need to be withheld, and no other employment taxes must be paid based on independent contractor pay.

But note this exception: You must withhold federal income taxes from independent contractor payments if the contractor has not provided you with a valid tax identification number. This is called "backup withholding;" read more about withholding for contractors in this article with FAQ about Backup Withholding.

5. Contractor pay is reported annually on Form 1099-MISC.

Form 1099-MISC for reporting contractor pay reporting is similar to Form W-2 for employee pay reporting. Form 1099-MISC must be given to the contractor by the end of January, and submitted to the Social Security Administration by the end of February.

6. Independent contractors must pay self-employment taxes.

Independent contractors are not employees and the companies they work for do not withhold Social Security/Medicare taxes (FICA taxes) from their pay. So the independent contractor must pay self-employment tax based on total income from self-employment each year.

Independent contractors are not employees and the companies they work for do not withhold Social Security/Medicare taxes (FICA taxes) from their pay. So the independent contractor must pay self-employment tax based on total income from self-employment each year.

7. Independent contractors can be any business legal type.

Typically an independent contractor is a sole proprietor, but the contractor can be set up in business as any type, including an LLC, partnership, or corporation. Depending on the type of work done by the contractor, it makes sense to form a business type which will limit liability. Read more about selecting a business type.

8. You may be able to continue to pay someone as an independent contractor.

 If you have been paying someone as an independent contractor, and you can show good reason for doing so, because of industry practice or other reasons recognized by the IRS, you may be able to continue to pay a worker as an independent contractor if you can meet these relief requirements, under Section 530 of the Internal Revenue Code.

9. Agreements help clarify expectations for independent contractors.

Even in the most casual situations, it's a good idea to create a contract for a contractor doing work for you.

The IRS does not look at the contract as "proof" that the worker is a contractor, but it helps both you and the contractor understand expectations and the nature of the relationship.

10. Confused about whether a worker is an independent contractor? Ask the IRS.

You can ask the IRS to give you a determination letter to clarify independent contractor status. Use IRS Form SS-8 to request a determination. You provide the information requested on the form and the IRS sends you a letter giving their opinion on the status of this worker (employee or independent contractor).