1. What is an Independent Contractor Agreement?
An Independent Contractor Agreement is a written contract between two parties for a specific service or project. One person or company is hiring another to help with a short-term task.
Unlike an employment agreement, this document explains why the hired party is not an employee for legal and tax purposes.
This document usually addresses the following essential elements:
Hiring Company: person or entity in need of special services
Contractor: person or entity hired for a project or task
Services: a specific description of the job to be performed or work product to be delivered
Compensation: how much and often the contractor will be paid
Effective Date: when the Agreement begins, and the job starts
Termination: whether the hiring company can end the relationship at any time (i.e., “at will” contract) and how many days’ written notice is needed beforehand
Fringe Benefits: the contractor cannot participate in any of the hiring company’s employee pension, health, vacation pay, sick pay, or unemployment benefits
Assistants: the contractor can hire their assistants but will be responsible for their assistants’ expenses like Social Security taxes and Medicare
Use our employment contract template if you are hiring an employee long-term.
Further, this document may also address these legal details:
- Assignment: neither party may transfer the right to get paid or the job to be completed to another party unless there is prior written permission
- Binding Effect: the Agreement is still in effect if another person or company takes over the hiring company or the contractor
- Entire Agreement: any previous agreements are no longer valid, and any future changes must be made in a written Amendment
- Expenses: each party is responsible for their own out-of-pocket pockets unless the hiring Company pre-approved certain costs and invoices are submitted
- Governing Law: the laws of a particular state will apply if there is trouble
- Indemnification: if any problems arise, the contractor will be responsible and must defend the hiring company from any liability
- Insurance: the hiring company’s insurance policy does not cover the contractor, who is responsible for their insurance
- Notices: all communications must be written and delivered properly
- Representations: both parties have the power and authority to enter the Agreement to be binding
- Severability: if one part of the agreement is invalid, the rest is still legal
- Waiver: releasing a claim or right must be made in writing
- Warranties: the contractor promises that it has all the licenses, permits, and registrations needed to complete the project
What’s in an Independent Contract Agreement
An Independent Contractor Agreement is often used when an individual or business is hired to complete a specific project or task on a short-term basis.
Our simple Independent Contractor Agreement sample includes all of the essential information:
- Who is being hired and by whom
- What kind of services will be provided
- When the relationship will begin and end
- Why the contractor is not an employee for legal or practical purposes
- How the contractor will be paid
Contractor vs. Employee: Who Should You Hire?
You need an Independent Contractor Agreement whenever you hire a person or business to perform a specific task with a clear start and end date. As the name suggests, a contractor has more control or autonomy over how to complete a project.
Further, a contractor often has unique skills or owns equipment needed for the assigned project or task.
Here is a table explaining the general differences between an independent contractor vs. employee:
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Don’t worry about acquiring any equipment; a contractor will typically use their tools to complete the job.
Here are some of the most common contractor situations, as compared to employees:
Independent Contractor Situations:
- Around the House
- Repaint your house
- Air conditioner or plumbing needs
- Landscaping services
- Pet sitting or dog walking services
- General contractor to oversee home improvement
- Business Needs
- Written report for a conference
- One-time web design or website creation for a client
- Software code for a specific task
- Diagrams or drawings for a product
- Event Planning
- Catering services
- Wedding photography
- Videography services
- Floral services
Employee Situations:
- Secretary hired to help every day
- Customer service representatives
- Analysts hired to figure out a problem
- Engineer working full time for startup
- Graphic artist permanently on staff
Consequences of Not Using an Independent Contractor Agreement
An Independent Contractor Agreement allows the hiring company and the contractor to detail what is expected and why the contractor is not an employee for legal and tax purposes.
As a general rule, the IRS treats independent contractors as self-employed, and their earnings are subject to self-employment taxes. In contrast, if an employer-employee relationship exists, the hiring company is responsible for Medicare and Social Security taxes.
In the eyes of the federal, state, and local governments, a contractor is self-employed for tax purposes.
Without this document, the hiring company risks being treated as an employer in the eyes of the law and the IRS. Instead, this form explicitly establishes that the person or entity is not an employee. Further, the hiring company should file a Form 1099.
The University of North Carolina in Charlotte summarizes the IRS Twenty Factor Test for determining a contractor’s status.
Here are some of the possible consequences that could be prevented:
- Financially Responsible for
- overtime pay
- unemployment benefits
- Medicare and Social Security taxes
- penalties for not having the proper work or business permits or licenses
- Legally Responsible for
- work injuries suffered on the job
- any damages caused while performing the task
- defending lawsuits about unlawful discrimination
What if the hiring company is worried about its confidential information?
While working for the hiring company and after finishing the project, the agreement demonstrates that the independent contractor promises not to share any protected information learned while on the job – often known as a confidentiality agreement clause.
The contractor understands that such valuable information belongs to the hiring company. If the protected information is shared without the company’s permission, the company has the right to sue the contractor and recover attorney fees.
Who owns the intellectual property developed by the independent contractor?
Under Section 101 of the Copyright Act, a hiring company becomes the rightful owner of any “works made for hire” created by the contractor. Alternatively, the contractor owns the work product but gives the hiring company a limited, non-exclusive license to use the material.
For example, Francesco asks Leonardo to paint a picture of his wife, Lisa. If the painting is a “work made for hire”, Francesco owns the painting and can make copies to give to his family as a Christmas present.
Alternatively, Leonardo can own the painting but permit Francesco to keep the painting. Francesco, however, must ask Leonardo for permission before he sells the painting of Lisa to other people or makes any copies of the painting.
