What is an Independent Contractor Agreement?
An independent contractor agreement is a contract between a company and an individual service provider used to establish the terms of a project-based or temporary employment. The agreement outlines the services provided by the independent contractor and the fees paid by the company for completion. It may also include conditions and provisions corresponding to liability, legal rights, confidentiality, and applicable jurisdiction.
Independent contractors are responsible for things that full-time employees typically aren’t, such as paying income tax (it doesn’t automatically come out of the check like regular employment), using their tools (unless the company provides them), and getting health insurance.
Independent contractor agreements are designed to protect the rights and interests of both the contractor and the hiring company, providing clear descriptions of the projects or responsibilities and the details of deadlines, expected quality or outcomes, and payment schedule. Independent contractor agreements also incorporate conditions related to intellectual property, authority, equipment, training, benefits, and the duration of contract.
Benefits of an Independent Contractor Agreement for an Employer or Company
Independent contractor agreements let companies fill necessary yet temporary positions without having to hire a full or part-time employee while avoiding the need to provide training or supplies. Independent contractors typically have more urgency and reason (as entrepreneurs) to provide a higher quality of service to warrant earning continued business. A well-written agreement will protect both companies and independent contractors from liabilities and lawsuits by clearly specifying respective roles, duties, payments, deadlines, and dispute resolution, among other procedures relative to the project and working relationship.
Important Notes: What to look for in an agreement if you’re an Independent Contractor
If you’re an independent contractor receiving an agreement from an employer, there are several things that you want to look for and understand:
- Make sure they classify you as an independent contractor and not as an employee; employees may be entitled to benefits and different tax obligations.
- Agreement defines the nature of the work to be completed.
- Details a list and number of all the supplies, tools, materials, and other items that will get used towards the completion of the project.
- States the exact address of the location where the project will get worked on, finished, and delivered.
- Describes the development process, a schedule of when and how tasks will get delivered, and systems in place to resolve missed deadlines.
- Who will be the point of contact for both parties? When and where will you have meetings?
- How will potential issues or disputes be resolved? Through alternative dispute resolution or litigation? Are there any provisions in regards to a breach of contract for either party?
- Presents the metrics used to accurately gauge the development and completion of each task or project.
- States any active, relevant licenses and insurance the independent contractor may have.
- Terms for intellectual property and its ownership, along with a non-disclosure clause to prevent the other party from disclosing information to competitors.
- Sets the completion or termination of the agreement; will it be after a specified duration or date? Or will it be after project completion? Can the agreement end early and following what conditions?
Types of Independent Contractor Agreements
Independent contractor agreements come in numerous forms, depending on the relevant industry, jurisdiction, and scope of services. Here is a list of some of the types of independent contractor agreements and their alternative names:
- Freelance Contracts
- Consultant Agreements
- Consulting Services Agreements
- General Contractor Agreements
- Subcontractor Agreements
- Service Level Agreements
For a big list of independent contractor agreements, check out our service level agreements or our general agreements page. You may also call our office at (800) 603-3900 for a free consultation and quote on a custom agreement for your services and independent contractor business.
Advantages and Disadvantages of an Independent Contractor Agreement
Being an independent contractor comes with several advantages and disadvantages, depending on the terms and provisions within the agreement; which is why you should hire a lawyer to write one for you. Here are some of the pros and cons:
- Free to operate within the rules and guidelines that you set for your business.
- A potentially vast network of clients instead of being employed by just one; losing a client has a minimal effect compared to getting fired by a full-time employer.
- Be your boss; answer to no one, only your results.
- Independent contractors may be entitled to own copyrights of the content they created—whereas content created as an employee belongs to the employer, but ultimately depends on the terms or lack thereof within the contract.
Advantages for Independent Contractors that Incorporate
An independent contractor that incorporates instead of functioning as a sole proprietorship (not recommended!) gains additional benefits and advantages than the few outlined above, such as:
Limited Liability and Asset Protection
Limited liability and asset protection—which means that you will be personally exempt from all debts and claims placed on your business; only your corporation or limited liability company will be liable, and your assets will be out of reach.
Business Tax Deductions
Tax deductions—among other tax advantages; being able to deduct business expenses related to travel, equipment, home office use, company meetings, car leases, and other tax-deductible commodities. Operating as an unincorporated independent contractor will not allow you the tax benefits from starting a corporation or forming an LLC, operating as a separate legal entity.
Professional Marketing Framework
Enables a more professional framework for marketing and branding yourself. A business that operates under a legal entity such as a corporation or a limited liability company gets perceived as more credible and reputable by both public and private interests. Depending on how you use it, a corporation or company will have an easier time acquiring clients, investors, shareholders and hiring quality staff.
Privacy and Anonymity
Privacy and anonymity—another great advantage gained from incorporating or forming a company if you’re an independent contractor; you can provide services, do business, sign contracts, and operate under your company or corporation’s legal name. You can also create alternate names for your entity (also known as fictitious names or DBAs) to enable further potential and flexibility for privacy, anonymity, and branding.
As an independent contractor, there may be disadvantages relevant to your business:
- A red flag on the IRS’ computer algorithm may show up if the independent contractor reports over $10,000 in earnings, or if the bulk of their revenue comes from one source; causing them to wonder whether you’re an independent worker or an employee of the company getting misclassified.
- Employee misclassifications are a common illicit practice for employers looking to avoid taxation.
- You may have to bring your tools, equipment, and materials as an independent contractor. If you do business under a corporation or company, at least you can write off supplies and other costs like vehicle and travel business expenses as valid tax deductions.
- You’re responsible for paying all taxes versus an employee who only pays the employee portion. Self-employment taxes are not withheld and have to be declared voluntarily by the independent contractor.
- No benefits, worker’s compensation, health or life insurance; an independent contractor is responsible for acquiring those themselves.
- Depending on your jurisdiction, there may be more regulations and stricter policies in place for independent contractors versus regular employees.
Spiegel & Utrera, P.A. Radio Show – Relevant Videos:
Competition with your Employer
Tax-deductible Business Expenses
Incorporating Corporations and Forming LLC’s