An independent contractor is someone who does work for a company without being directly employed by it. Some examples of independent contractors are freelance writers, delivery drivers, housing contractors and accountants. Before entering into an independent contractor agreement, both sides need to ensure that their responsibilities to each other are clearly defined.
Defining Work Expectations in an Independent Contractor Agreement
The most important aspect of the contract is to define the work that must be completed. The independent contractor should understand exactly what his or her job functions are, when the work is to be completed and the current rate of compensation. The contract should specify how pay is determined and when it will be delivered. For example, will the independent contractor be paid hourly, by the assignment, a set salary or by another method?
There should also be a section that discusses what actions are taken if the independent contractor’s work does not meet the company’s expectations. To avoid disagreements and possible litigation, an independent contractor agreement can outline steps to take if a dispute arises between the contractor and his or her client. A contract should clearly state reasons that it can be terminated. If the contract is for a set time period, a starting and ending date should be included.
Most companies that hire independent contractors allow them some freedom in how the work is performed as long as the work meets the company’s standard of approval. The contract must spell out that independent contractor work is work for hire. This means that all products created and services rendered become the intellectual property of the company to do with as it sees fit.
While performing his or her work duties, the independent contractor may be exposed to confidential company and client information. Most independent contractor agreements stipulate that the contractor must agree to not disclose this information to anyone who does not have a business need to know it. This agreement is good for the duration of the work assignments as well as a set number of years in the future. The contract needs to clearly state what actions will be taken if the confidentiality agreement is violated.
State, Federal and Social Security Taxes
For tax purposes, an independent contractor is self-employed. This means that no federal, state or social security taxes are withheld from his or her paycheck. If the independent contractor earns more than $600 in a calendar year, the company he or she worked for must issue a 1099-Misc form. A copy of the 1099-Misc form is also sent to the Internal Revenue Service.
Self-employed individuals are required to pay social security taxes at the same rate as other employers, which is twice the amount those who work as direct employees must pay. However, the independent contractor can write off expenses, such as mileage and office space, to offset some of the tax.