An independent contractor agreement is an agreement that highlights the relationship between a contractor and the hiring company. The Independent Contract agreement can be used by employers who plan to enter into a business deal with a contractor, consultant or freelancer.
More importantly, the freelancer, consultant or contractor can also draft the contract and deliver it to the hiring company in advance. Moreover, the contract is legally binding that includes written agreements from both parties to avoid misunderstandings and manage the business relationship’s expectations.
The Independent contractor Agreement has several other names including:
- 1099 Agreement contract,
- Freelance Contract,
- Subcontractor Agreement Contract,
- Consulting Agreement.
Independent Contractor (IRS Laws)
Under section 26 CFR31.3121(d)-1 of the IRS, an independent contractor has the following responsibilities:
- May control the entire work,
- Ability to work their own hours and schedules
- Using their own equipment when performing the task
- Control over the service completion
- Salespersons are paid on a commission basis
- Corporate officers, part-time.
The independent contractor is defined as an individual who is their own boss and sets the rules that justify their output and workflow. Ultimately, if a person is paid on a project or task basis, they are generally considered independent contractors. However, if the individual is paid a salary and has a specific schedule on what is expected on a given workday, they are employees.
Some of the professions that are classified as an independent contractor by the IRS include:
- Construction contractors
Applicable law for filing taxes;
As an independent contractor, you will need to file taxes at the end of the year if your income exceeds $600 in a calendar year in accordance with the IRS rules. You can use IRS Form 1099-MISC.
State Definitions (Laws)
- AL – § 25-7-41(5)
- AK – AS 23.20.526
- AZ – § 23-211(6)
- AR – § 11-10-210(e)
- CA – § 3353
- CO – § 8-70-115(c)
- CT – § 31-222(B)
- DE – § 3501
- FL – § 440.02(15)(d)
- GA – § 34-8-35(f)
- HI – § 383-6
- ID – § 72-1316(4)
- IL – 820 ILCS 185/5
- IN – § 22-3-6-1(b)(7)
- IA – § 85.61-11-c.(2)
- KS – § 44-703 (i)(3)(D)
- KY – No Statutory Definition
- LA – § 23:1021
- ME – 39-A § 102.11.(7)
- MD – No Statutory Definition
- MA – § 149 – 148B
- MI – IRS 20 Factor Test
- MN – § 181.723.4
- MS – § 71-3-3(r)
- MO – IRS 20 Factor Test
- MT – § 39-71-417, § 24.35.101(7)
- NE – § 48-604(5)
- NV – § 612.085
- NH – § 282-A:9(III)
- NJ – § 43:21-19(6)
- NM – § 51-1-42(5)
- NY – § 511
- NC – No Statutory Definition
- ND – § 52-01-01(17)(k)
- OH – § 4141-3-05
- OK – No Statutory Definition
- OR – § 670.600
- PA – No Statutory Definition
- RI – § 28-29-2(11)
- SC – § 42-1-130
- SD – § 61-1-11
- TN – § 50-6-102 (12)(D)(1)
- TX – § 201.041
- UT – § 34A-2-103(2)(b)(i)
- VT – 21 V.S.A. § 601
- VA – VA Code § 65.2-101
- WA – RCW 51.08.181
- WV – § 48-18-125(3)
- WI – § 102.07(8)(1)
- WY – WY Stat § 27-14-102(xxiii)
Writing an Independent Contractor Agreement
The Independent Contractor Agreement is a document beneficial to both parties. Therefore, the content should be clear, concise, highlighting all the business relationship’s scopes and straight to the point. Without a doubt, the content should pay close attention to the work scope, the interests of both parties and the workload.
That said, here’s a checklist that should help you draft the best contract Agreement:
The first crucial piece of the Independent Contractor Agreement is the introductory paragraph that will include details of the company hiring or the freelancer contractor. This paragraph should contain the legal names with addresses to both parties.
The scope of work
Another critical factor of the contract should be the scope of the work. This section will describe the task, services or product that will be procured during this agreement. Ensure this part also includes a detailed description of your business relationship to make it clear that the contract doesn’t form a joint venture or partnership; it’s purely an independent contract. More importantly, this clause will include a solid detail of the contractor’s expectations and the workload to reduce any misunderstandings.
The contract should also include a payment schedule specifying whether the payments will be in installments or the frequency. That should reduce any payment hindrance or misunderstandings of the sort.
This clause in the form will include the precise payment plan of choice, and the contractor is to tick on the box that summaries the payment process, for instance, hourly or daily.
The contract beginning date should be listed in the document and the expectation of when the work will start.
Liability and benefits exclusion
Even though it’s clear that the independent contractor doesn’t enjoy the regular employee’s perks, this contract should also include that information. In the document, you should outline that the client will not pay the social security, sick pay, Medicare, worker’s compensation, etc. The independent contractor is responsible for paying their state and federal tax and any obligation of the sort.
This part highlights whether or not the independent contractor has permission to hire subcontractors or assistants. In such a case, the client should give consent in advance to hiring extra personnel. Above all, this clause should also note that the independent contractor is responsible for paying the subcontractors inclusive of their taxes, hence freeing the client from such financial liabilities. Compliance with the contract should also extend to the subcontractors as well.
Project completion date
in the project completion date section, the contractor will detail the date of completion of the task. That will ensure both parties understand how the job will be done and when the results are expected.
Identification of the party to incur the expenses
This section must show the incurred expenses in completing the task and the party that should assume responsibility for such costs.
This clause of the contractor’s agreement should be based on the workload and the contract’s termination after deliveries. But if the independent contractor is hired on a long-term basis, the contract should contain the days of written termination and any extra detail. On rare occasions, either party may want to terminate the contract prematurely. If such a case is allowed and the process should be stated in this section. Additionally, this clause will also show whether both parties or just one will retain the right to terminate the contract.
This section of the Independent Contract Agreement covers the clients’ responsibilities to fees against the contractor. The clause should state that the contractor will indemnify the client for any claims or losses that may result from the contractors’ actions.
This section ensures the rest of the clause is still valid even though a part of it might cease from being so.
The contract should include any state or country’s governing laws that apply to this agreement if any legal troubles may arise during the business relationship. Additionally, each State offers a set of rules that should be followed when initiating this contract.
The waiver clause serves as proof of the releasing rights in the business relationship between the contractor and the hiring company. As much as this is standard practice, it should be included in the writing.
This part indicates clearly that the contractor should have liability insurance for the business, and the client is not responsible for that.
When you are hiring the contractors, you should count on the contractor’s capacity to complete the task availed to them. This warranty section shows that the independent contractor can and warranties that they will complete the job.
Intellectual ownership and property
Suppose the client owns ownership of any intellectual property that might be developed during this relationship. In that case, this section should be stated to avoid any legal battles or laws, and all necessary information on intellectual rights should be listed.
When working with a freelancer, you are bound to share discrete information that’s confidential to your business. Such information could make you uncomfortable, leading to a trust difficulty between the two parties. With that in mind, the Independent Contractor Agreement should include a confidentiality clause with information such as patent rights, trade secrets, copyrights and marketing plans, etc.
Both parties are allowed to add additional information that might prove relevant to the contract, which is why there’s a blank space.
The contractor’s signature
Both parties must take their time to review the contract before signing and agreeing to the clause. That’s because their interaction, at least business-wise, will follow this contract and should be conducted the same. Once both parties are in agreement, then they can sign the contract.
Independent Contractor Agreements (By State)
The independent contractor Agreement will slightly differ from State to State depending on the governing laws. As such, it’s crucial to understand the laws within your specific State before printing out the contract. All the same, the goal of the contractor’s agreement remains the same globally.
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Importance of Classifying Employees
The IRS and the DOL typically conduct regular company audits, and the goal is to find misclassified contractors. The consequences of such irregularities will attract ramifications to the hiring company. The IRS will also impose additional penalties and fees if they suspect intentional misclassification or suspect fraud.
The primary reason for ensuring a business has clearly defined employee, employer and contractor roles stem from the filing tax position. With such regulations, the company can comply with the employment laws, and employers can pay the taxes accordingly.
Benefits of Hiring An Independent Contractor
Working with an independent contractor comes with several perks including:
- You don’t have to pay their health insurance.
- You don’t have to pay their Tax obligations
- Less paperwork is involved
- You don’t have to pay them for the work agreed upon
- There’s no need to micromanage their work
- The process of ending the contract is easier than firing an employee
What is the difference between an independent contractor and an employee
The independent contractor is termed as a seasonal individual and paid for the services they provide while an employee is part of the business. The independent contractor will likely pay for their tax, social security, insurance and additional expenses, which is not the case for an employee.
How do I protect the company’s confidential information as a contractor
Using the Confidential clause in the Independent Contractor Agreement, which will highlight any copyright or trade secret information leaked, will attract a lawsuit.
Can an independent contractor have a non-compete agreement
An independent contractor shouldn’t sign any non-compete agreement since it might not be unenforceable if it’s challenged.
How to terminate an independent contractor agreement
The termination process should be listed in the Termination Clause and who reserves the rights of termination. Whether or not the termination of the contract is allowed will be listed in the same clause.
How often must an independent contractor agreement be renewed
The Independent Contractor Agreement should be renewed whenever there’s an alteration to the contract or termination.
Who owns the intellectual property created by an independent contractor
In most cases, the intellectual property is owned by the client but should be listed on the independent contractor agreement.