Independent contractor

Back to HR Glossary

What is an Independent contractor?

An independent contractor is a self-employed individual or business that provides goods or services to another business or individual. Unlike employees, independent contractors are not considered part of the company they work for and are not entitled to the same benefits and protections as employees. They are responsible for their own taxes, benefits, and expenses and are not covered by the employer’s workers’ compensation or unemployment insurance.

Summarise this post with:

chatgptChatgpt perplexityPerplexity geminiGemini grokGrok claudeClaude
Image showing the meaning of an independent contractor

Independent contractors are typically paid on a project-by-project basis and are free to work for multiple clients simultaneously. They also have more control over their work schedule and how they perform their tasks. Independent contractors are typically considered to be in business for themselves and may have their own company or business name. They are not considered employees and are not subject to the same employment laws and regulations as employees.

What are the responsibilities of an independent contractor?

Independent contractors are responsible for the following: HBR’s contractor and gig worker research

  1. Providing their own equipment and supplies: Independent contractors are typically responsible for providing their own tools and equipment necessary to complete the job.
  2. Completing their work according to the terms of their contract: Independent contractors are responsible for completing their work according to the terms of their contract, which may include specific deadlines, deliverables, or standards of quality.
  3. Paying their own taxes: Independent contractors are responsible for paying their own taxes, including self-employment taxes.
  4. Securing their own insurance: Independent contractors are responsible for securing their own insurance, such as liability insurance, for protecting themselves and their business.
  5. Complying with relevant laws and regulations: Independent contractors are responsible for complying with all relevant laws and regulations, such as those related to business licenses and permits and health and safety standards.
  6. Managing their own schedule: Independent contractors have more control over their work schedule and how they perform their tasks than employees.
  7. Keeping records and invoicing: Independent contractors are responsible for keeping accurate work records, such as time sheets, and invoicing the client for the work completed.

What are the benefits of hiring an independent contractor?

There are several benefits to hiring an independent contractor, including the following: SHRM’s independent contractor guidance

  1. Cost savings: Independent contractors typically charge on a project-by-project basis, which can be more cost-effective for companies than hiring full-time employees.
  2. Flexibility: Independent contractors can work on a project-by-project basis, allowing companies to bring in specialized skills and expertise.
  3. Tax savings: Companies do not have to pay taxes, such as unemployment insurance and workers’ compensation, on independent contractors, which can result in cost savings.
  4. No employee benefits: Companies do not have to provide employee benefits, such as health insurance or retirement plans, to independent contractors, which can result in cost savings.
  5. Specialized expertise: Independent contractors often have specialized skills and expertise in a particular area, which can be particularly useful for companies that need specific skills or knowledge to complete a project.
  6. Less administrative work: Companies do not have to handle administrative tasks for independent contractors, such as payroll and benefits administration.
  7. Greater control over the project: Independent contractors work on a project-by-project basis, which allows companies to have more control over the project, and can be more flexible in terms of the work schedule and the way the work is performed.

Correct independent contractor classification is a critical HR compliance requirement : misclassification carries substantial legal and financial risk. Using pre-employment assessments alongside a structured hiring plan drives results. Strong talent acquisition focused on skills-based hiring improves outcomes.

Frequently asked questions

An independent contractor (IC) is a self-employed individual who provides services to clients under a contract, retaining control over how the work is performed. ICs are not employees : they set their own hours, use their own tools, may work for multiple clients simultaneously, and are responsible for their own taxes (self-employment tax). The client pays for results, not for employment.

The IRS applies a multi-factor test examining three categories: (1) Behavioral control : does the company control how work is done (methods, tools, sequence)? Employee indicators: detailed instruction, extensive training. (2) Financial control : does the company control business aspects? Employee indicators: reimbursed expenses, no investment in tools, no opportunity for profit/loss. (3) Type of relationship : permanent relationship? Benefits? Services integral to core business? More employee indicators = employee.

The Department of Labor’s 2024 rule uses an economic reality test examining six factors: (1) opportunity for profit or loss; (2) investments by the worker and potential employer; (3) degree of permanence; (4) nature and degree of control; (5) whether work is integral to the employer’s business; (6) skill and initiative. No single factor is determinative : the totality of the economic relationship is examined.

Misclassification penalties include: back taxes (employer share of FICA : Social Security and Medicare : for the entire misclassification period), interest on unpaid taxes, IRS penalties (up to 35% of taxes owed for intentional misclassification), state tax liabilities, retroactive benefits entitlements (vacation pay, health insurance in some states), FLSA back wages (overtime and minimum wage), workers compensation exposure, and state-level penalties which can be substantial in California (PAGA).

California’s AB5 (2019) implemented the ABC test : an individual is an employee unless the hiring entity proves all three: (A) the worker is free from control in performance of the work; (B) the work is outside the usual course of the hiring entity’s business; (C) the worker is customarily engaged in an independently established trade or occupation. This is far stricter than federal standards; many workers qualifying as ICs federally are employees under California’s ABC test.

Risk mitigation: conduct a legal classification analysis before engaging any contractor, document the independent basis for contractor status, use a written services agreement that describes deliverables (not hours or methods), avoid providing tools, equipment, or training, allow contractors to work for other clients, avoid integrating contractors into employee activities (company events, internal systems), implement tenure limits and engagement rotation, and conduct periodic audits of all contractor relationships with employment counsel.