The Definition: What is an Independent Contractor Agreement?
An Independent Contractor Agreement is a written contract between two parties for a specific service or project. One person or company is hiring another to help on a short term task. Unlike an employment agreement, this document clearly spells out why the party being hired is not an employee for legal and tax purposes.
This document usually addresses the following basic elements:
- Hiring Company: person or entity in need of special services
- Contractor: person or entity hired for a project or task
- Services: specific description of task to be performed or work product to be delivered
- Compensation: how much and often the contractor will be paid
- Effective Date: when the Agreement begins and the job starts
- Termination: whether the hiring company can end the relationship at any time (i.e. “at will” contract) and how many days written notice is needed beforehand
- Fringe Benefits: the contractor cannot participate in any of the hiring company’s employee pension, health, vacation pay, sick pay, or unemployment benefits
- Assistants: the contractor can hire their own assistants but will be responsible for their assistants’ expenses like Social Security taxes and Medicare
Further, this document may also address these legal details:
• Assignment: neither party may transfer the right to get paid or job to be completed to another party unless there is prior written permission
• Binding Effect: the Agreement is still in effect if another person or company takes over the hiring company or the contractor
• Entire Agreement: any previous agreements are no longer valid and any future changes must be made in a written Amendment
• Expenses: each party is responsible for their own out-of-pocket pockets unless the hiring Company pre-approved certain costs and invoices are submitted
• Governing Law: the laws of a certain state will apply if there is trouble
• Indemnification: if any problems arise, the contractor will be responsible and must defend the hiring company from any liability
•Insurance: the hiring company’s insurance policy does not cover the contractor, who is responsible for their own insurance
As a reference, this document may also be referred to as:
• Client/Service Freelancer Agreement
• Company Contractor Agreement
• Contractor Agreement
• Freelance Contract
• Freelancer Agreement
• Freelancer Contractor Agreement
• Independent Consultant Agreement
The Consequences of Not Using This Document
An Independent Contractor Agreement allows the hiring company and the contractor to detail what is expected and why the contractor is not an employee for legal and tax purposes. As a general rule, the IRS treats independent contractors as self-employed and their earnings are subject to self-employment taxes. In contrast, if an employer-employee relationship exists, the hiring company is responsible for Medicare and Social Security taxes.
In the eyes of the federal, state, and local governments, a contractor is self-employed for tax purposes. (Independent Contractor)
Without this document, the hiring company risks being treated as an employer in the eyes of the law and the IRS. Instead, this form explicitly establishes that the person or entity is not an employee. Further, the hiring company should file a Form 1099. Learn more about the different tax implications for a contractor from Intuit TurboTax. The University of North Carolina in Charlotte summarizes the IRS Twenty Factor Test for determining a contractor status.
Here are some of the possible consequences that could be prevented:
• Financially Responsible for
• overtime pay
• unemployment benefits
• Medicare and Social Security taxes
• penalties for not having the proper work or business permits or licenses
• Legally Responsible for
• work injuries suffered on the job
• any damages caused while performing the task
• defending lawsuits about unlawful discrimination
What if the hiring company is worried about its confidential information?
Independent Contractor: While working for the hiring company and after finishing the project, the agreement demonstrates that the independent contractor promises to not share any protected information learned while on the job. The contractor understands that such valuable information belongs to the hiring company. If the protected information is shared without the company’s permission, the company has the right to sue the contractor and recover attorney fees.
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