What Is an Independent Contractor?

What Is an Independent Contractor?
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Definition: 

An independent contractor is someone that works for a company without benefits and on a contract basis. An independent contractor should be able to set their own hours. The pay rate is usually higher because an independent contractor will not qualify for unemployment when the contract ends. When you are an independent contractor, your employer cannot determine when and how the work be completed, just that it is finished on time and that it meets their qualifications for the project.

Who Hires Independent Contractors?

Some companies choose to hire people as independent contractors rather than as full-time employees. If you are considering doing this, you must realize that you will be considered self-employed. This may happen if you are a temporary employee or if you work primarily from home. It is important to realize the differences between a full-time employee and an independent contractor. The IRS has strict guidelines about independent contractors and full-time employees. Some companies are moving to independent contractors to save money on taxes and other employee benefits. If you want to wrk as an independent contractor, you need to make sure that the company you are working for is treating you fairly.

How Are Independent Contractors Different from Employees?

An independent contractor will not be offered benefits by the their employer. Taxes will not be taken out of the check.

Independent contractors will set their hours, and determine when and how to do the work. Independent contractors may have a more flexible schedule, and many work from home, all though some work on site as temps. An independent contractor is considered self-employed. Although you may only be working for one company at a time, you are still considered self-employed for tax purposes.

It can also affect you when it comes to borrowing money over time.

What Will I Do Differently as an Independent Contractor?

As an independent contractor you will need to set aside money for your taxes, and pay your taxes quarterly. When you are hired you will fill out a W-9 form instead of W-4. You will need to file your own taxes each quarter. This is easier than coming up with all of the money at the end of the year. When you do file your taxes, the companies you work for will send you a 1099 form instead of a W-2. You will be able to deduct business related expenses from your taxes, and you may want to hire an accountant to help you understand what is acceptable. This is especially important the first year you work this way. Many self-employed people or independent contractors work for more than one business each year, and you should wait until you have all of your information before you file your taxes. You may also want to use an accountant the first few years you file your taxes as an independent contractor.

You will also need to purchase your own health insurance and plan for your retirement on your own. You should also plan a larger emergency fund to cover yourself if you were to lose your job or were unable to work.

Most independent contractors do not qualify for unemployment benefits. You will not be paid sick days or vacation days and you need to have extra money set aside for these situations. However, many independent contractors are paid more per hour, which you can use to offset the cost of covering your own benefits. It is essential that you have a budget in place when you work as independent contractor and that you save money to cover the dry spells between contracts.

What If My Employer Says I Am an Independent Contract But Treats Me as an Employee? 

There are strict guidelines for when an employer can choose to classify someone as an independent contractor. If you feel that you should be considered an employee instead of as a independent contractor because of specific work hours or conditions you can appeal through the IRS using form 8919.