Independent Contractor Agreement (Free Templates)

Companies and organizations may sometimes require short-term services for which they do not need permanent employees. These services can be outsourced by contracting independent individuals or firms and establishing an independent contractor-client relationship instead of an employer-employee relationship. The contract used in such instances is called an independent contractor agreement.

It is an agreement between a freelance service provider and a client stating the services to be provided and strategizing the terms relating to the service provision. The independent contractor agreement helps employers avoid the responsibility of hiring employees to perform small tasks related to their job description.

This article discusses the independent contractor agreement in depth, including the services that can be outsourced, individuals who can use it, and what terms should be included in such agreements. The article also discusses how these agreements work and describes the relationship and responsibilities that parties of this contract have towards each other.

Independent Contractor Agreement

An independent contractor agreement is an arrangement between an independent contractor and their client to provide services.

It represents the task, the amount paid for each task, and the period within which it should be done. Unlike in an employer-employee relationship, an independent contractor agreement is a service contract which means the independent contractor is not an employee and therefore does not have the same benefits an employee would. Because the employer is only a client, they only need to see the results of the task and have no control over the performance of the task itself.

Further, while employers pay withholding tax on behalf of their employees, independent contractors pay their withholding tax to local and federal authorities according to Internal Revenue Service (IRS) rules using IRS Form 1099-MISC.

Alternative names

The independent contractor agreement serves various purposes and is often used to provide different services. Because of this, the agreement may be referred to by different names to distinguish the services being provided; some of the names include:

• Independent contractor contracts
• 1099 contractor agreement
• Subcontractor agreement
• Freelance contractor agreement
• Contract labour form
• Consulting Agreement
• Freelance contract
• General contractor agreement
• Consulting services agreement

Elements to Include

The independent contractor agreement has to include some essential terms for it to be valid. In addition, some terms should also be included for the benefit of the contractor and their client, including:

• Parties: The contract should include the parties’ names and contact information for accessible communication if the need arises.
• Contractual period: The agreement should state how long the agreement will last and, where necessary, how long each phase will take if the project starts.
• Services: The agreement should discuss the services to be provided by the independent contractor. If possible, the details should be clear to avoid confusion about what the service does or does not include.
• Compensation: Because it is a contract, it should also represent the amount the client will pay for the service.
• Confidentiality: Independent contractor agreements often involve sharing sensitive information about the client; it is essential to include a confidentiality clause to protect the client’s information.
• Dispute resolution: The dispute resolution clause lets the parties know which forum to use should a dispute concerning the contract arise. This clause also helps the party avoid unnecessary litigation, which is costly.
• Non-solicitation: The non-solicitation clause prevents the contractor from directly contacting the client’s customers to provide service to them.

Advantages of hiring contractors

Contractors only come in to provide a service like completion of a short-term project and expert consultation services. Contractors allow companies to save money that would have been used in hiring an employee for a short-term task.

Independent contractual agreements also provide legal protection to clients where contractors fail to complete the work or achieve acceptable standards. It also protects contractors who are not compensated fully for their services because it can be used as proof of the correct payment that was to be made. Independent contractors are easier to manage because they do not require constant supervision like employees. Since their contracts expire once they finish their duties, clients do not have to go through the process of terminating them as they would with an employee. Generally, contractors do not accumulate as much paperwork as employees.

Note: Which professions are independent contractors? While there are no stipulations as to what profession an independent contractor can be, there are some common professions whose services are often provided on an independent contract basis. In the U.S, however, some of the following professionals can be independent contractors:

– Doctors
– Dentists
– Veterinarians
– Lawyers
– Auctioneers
– Writers

Why, When, and Who Can Use an Independent Contractor Agreement?

The independent contractor agreement serves different purposes and benefits. Those who do not want long-term employees often use these agreements because they fit their needs. For these reasons, knowing why, when, and who can use these agreements is essential.

Why

An independent contractor agreement states the terms of service between the contractor and client. Some of the reasons why this agreement is essential are discussed below:

Setting expectations

The contract has clauses representing each party’s obligation, the time allocated for the project or task, and the compensation to be paid after the work is done. The expectations presented help the parties avoid vague descriptions of the scope of each party’s control over the process and end product.

Product ownership

Because of the nature of the contract, both parties must agree on who owns the product. The task, project, or service provided is the client’s property, typically stated in the agreement to avoid doubt. Further, the confidentiality clause protects the client against the contractor should they disclose critical business information.

Contractor-client relationship

Unlike an employer-employee relationship, the contract sets the tone for a contractor-client relationship. Therefore, it is essential to avoid situations where the contractor might seek benefits only employees are entitled to.

When

The independent contractor agreement should be used when an independent contractor has been hired to provide services to a client. It should also be used when clients have contracted independent contractors, primarily freelancers. In such instances, the client is assumed to have more information about the requirements and provides an agreement for assessment and approval by the contractor.

Who

The agreement is a mutually beneficial document that serves the interests of all parties involved. As such, it is often used by contractors, freelance service providers, consultants, and clients seeking the services of independent contractors.

How Does It Work?

Since the agreement is for a specific service, the potential client has to describe the services needed and find contractors that would be right for the job. Once they have an agreement, they should reach the contractor and take the following steps:

Contractor completes IRS form

The contractor must complete the W-9 form, an IRS form that the contractor and their client sign. While the client does not have to file this form with the IRS, they must keep it in their records for up to four years. The form shows that the relationship between the parties is based on an independent contractor agreement; it also represents the tone for any tax obligations for both parties.

Verify the contractor

Before negotiating with the contractor, the client needs to verify that the contractor is legitimate and that they have a good track record. They can verify through running background checks or through checking client reviews if there are any. It is essential to verify because the contract is legally binding.

Negotiation between parties

If the contractor is of good reputation, the parties can negotiate the terms of the contract. At this point, it is clear that the client needs a particular service that the contractor can provide. What is to be negotiated are terms like compensation, the duration of the agreement to pay insurance, confidentiality, and consequences of breach of any of the terms.

Complete the contract

Now that the parties have negotiated, completing the contract with all the agreed-upon terms is necessary. Therefore, neither party may prepare the contract but must agree with the discussed terms.

Sign the agreement

Now that the contract is complete, both parties need to sign it to make it legally binding. The contract should be signed by the parties simultaneously in the presence of a notary public or a witness and initialized. To protect the contract from being amended after it has been signed, it should be initialized at the bottom of every page.

File with IRS 1099

The agreement for compensation worth more than $600 must be filed with the IRS through form 1099-NEC, the Nonemployee Compensation form. Filing is crucial because it allows both parties to know their tax obligations.

Independent Contractor Vs. Employee

Employees and independent contractors are contracted on different terms, so before hiring, employers should consider the task to be done and discover whether they need an independent contractor or an employee.

Independent contractors are self-employed and can work for different people simultaneously as long as they fulfil their obligations. For example, independent contractors are responsible for their insurance and tax obligations shown in the form W-9. They also work on fixed terms or short projects, and their obligation to the employer ends with the contract expiry. For independent contractors, employers only get to see the result and assess it; they do not provide equipment for fulfilment of the task, nor do they control how it is done.

In terms of responsibility, employees are entitled to benefits like insurance and payment by the employer, who is also responsible for the payment of withholding tax. In addition, employees only work for one employer on a set wage and long-term basis. Finally, in terms of control, employers exercise more control over employees in their day-to-day activities and have the authority to assign them different tasks.

Information to Include

Remember that the independent contractor agreement is legally binding. Therefore, the details must be correct, current, and verifiable, as discussed below:

Specify the location

The location of the agreement matters because each state has its laws. Stating the location allows both parties to assess whether the contract meets state requirements. Agreements that do not meet state requirements may be unenforceable should any issue arise.

The type of service required

The service to be provided should be as straightforward as possible to avoid misconstruction of the scope of the agreement. The details should include all contractual obligations, and where the description may be interpreted differently, it should be excluded from the contract.

Contractor and client’s details

The details of both parties should be captured clearly in the contract, and they should include current contact details for accessible communication. The nature of the parties, whether individuals or companies, should be included to show the communication hierarchy if needed.

Compensation details

Compensation is a vital part of the contract; it must be provided according to the agreed-upon terms. The following compensation details should be included:

Billing

Billing is the rate at which the contractor will be paid. For example, short-term services may be billed hourly or flatly per day, week or month. The invoices are a way for the contractor to record the payments.

Retainer

The retainer is the amount to be paid before the task is done. It acts as security for the services to be provided.

Payment schedule

The compensation section should set the terms if both parties agree on a payment schedule. For example, it may be a monthly payment or payment after the completion of a phase; either way, the same must be represented.

Late payment

In most contracts, there is a provision stating whether any penalties or interests should accrue for late payment. The provisions also show the duration that could be considered late payment, usually 15 to 30 days.

Agreement’s terms

The agreement’s terms are often as important as the contract itself; if they are broken, the aggrieved party may seek legal redress.

Some of these terms include:

Termination

The parties should represent when the contract ends, which will be an automatic termination, typically once the task is complete. Parties can also include an opt-out clause for either of them; if so, the contract should state the notice period to be given before the contract is considered terminated.

Reimbursing expenses

Sometimes, the contractor may incur expenses their client should pay; the contract needs to state the expenses the client may pay for and whether approvals need to be sought.

Intellectual property

Intellectual property refers to the creation of the mind; it includes artistic works, designs, and symbols. In typical situations, intellectual property is owned by its creator; for employees, the intellectual property is owned by the employer. For independent contractors, the agreement may specify who owns the property.

Confidentiality

The confidentiality clause protects the client’s business information. Most contracts have this clause for the protection of information and to assign liability in case the information provided is shared with an unauthorized party. The contracts should state that information pertinent to the business should not be shared and where it can be shared, state the parties that are authorized.

Additional clauses

After including all the critical clauses, the parties may consider particular circumstances or any other clauses they feel are necessary, for example, non-compete, legal expenses, return of the property, and indemnity clauses.

Authorization

The authorization should include when the parties will sign the contract and whether there will be a witness, a notary public, or both. In addition, there should be spaces for the date of authorization and witness(es).

Independent Contractor Agreement Templates

Independent contractor agreements are technical documents that may be confusing and difficult to understand. So instead of writing from scratch, we provide free downloadable independent contractor agreement templates that are easy to use. There are different templates you can choose from depending on the type you want, including:

One page

A one-page independent contractor agreement is for the provision of services for a particular period. But unlike more comprehensive agreements, it only contains the basic terms to make it enforceable and legally compliant. In addition, it is simple and easy to read.

Contingency fee

Attorneys and their clients usually use the contingency fee agreement. In this contract, the compensation paid will be a percentage of the amount recovered. This type of agreement allows clients who cannot afford to pay upfront to access legal services.

Consulting

The consulting agreement is used by businesses seeking to hire an expert in particular business operations for consultation purposes. They include contracts for IT consultants, HR consultants, and leadership consultants.

Employee

An employee agreement is signed between the independent contractor and their employees. It provides for the insurance and compensation benefits owed to the contractor’s employees.

HIPAA

The HIPAA agreement is a contract between business entities and associates that can access and share medical records within limits. The business associate can share medical records but is fully liable in case a breach concerning the medical records occurs.

Non-compete

The non-compete agreement is a legally binding contract that prevents an independent contractor from providing services to or competing with its client for the duration of a contract and for some time afterward. They are used where a business has shared pertinent information concerning its operations and seeks to protect its trade secrets.

Non-disclosure

A non-disclosure agreement binds the independent contractor from revealing or using sensitive information learned during the contract. In addition, the agreement states that the contractor will be legally liable for any intentional disclosure.

Retainer agreement

A retainer agreement is a contract between a client and an independent contractor to provide particular services at monthly hours. The parties discuss the services to be provided and the number of hours billed per month for a particular amount. Any amount over that is billed at the professional’s average rate.

Service contract

A service contract is an agreement to provide labour-related services at an agreed rate, hourly or project-based. It is a definitive agreement where the service provider bills according to the market rate. Often, the service provider retains the right to refuse to provide services.

Subcontractor

A subcontractor agreement is established where a contractor contracts a third party to provide services they cannot provide. While the client pays the contractor directly, the subcontractor is paid by the contractor.

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Consequences of Misclassifying Employees as Independent Contractors

Misclassifying an employee as an independent contractor is a grave mistake with significant financial consequences. According to the U.S Department of Labour, an employer that misclassifies an employee as an independent contractor will incur the following penalties:

• A $50 fine for each unfiled W-2 form
• Fines for failing to withhold taxes, including 40% of FICA taxes, and 1.5% of wages paid to employees
• Back payment for unpaid employee benefits, including lost wages and unpaid overtime
• Failure to pay tax fine of up to 25%

Frequently Asked Questions