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An Independent Contractor Agreement is a legally binding contract between two parties — a person or entity in need of special services, also referred to as hiring company, and a person or entity hired for a project or task, also referred to as a contractor — for a specific project or service. In general, professionals use the agreement when a project is short-term; in most cases, an independent contractor is paid on a per-project or job basis and not by the hour, unless agreed upon by both parties. Unlike an employment contract, an independent contract agreement clearly indicates that a person or company hired is not an employee for legal and tax purposes.
May also be called as Contract Labor Form, Subcontractor Agreement, Consulting Agreement, Freelance Contract, General Contractor Agreement, and Consulting Services Agreement, an independent contractor agreement is used by a hiring person or company to enter into a short-term agreement with consultants, freelancers, and independent contractors who can provide their products or services in exchange for monetary compensation.
By definition, an independent contractor is a professional or entity that is hired as a solo business owner and does not have employee benefits. When an individual is self-employed, he or she pays self-employment tax, Social Security, and Medicare, and income taxes — he or she handles everything independently. When a person or company hires an independent contractor, withholding anything from payments made to the latter is not the responsibility of the former. Thus, an independent contractor sends his or her own estimated tax payments to the Internal Service Revenue (IRS), the U.S. federal tax agency, every few months. The federal tax agency classifies an independent contractor as someone who is able to control the ways services are completed, is able to work on his or her own schedule, has control over work attire, is paid solely on commission, and uses his or her own tools and equipment when providing services.
An independent contractor agreement is advantageous, as it saves a professional or business from costly and time-consuming legal problems. That is why it is mandatory to clarify and define in the agreement that the professional or entity that will provide its products or services is an independent contractor and not an employee, stating details pertinent to the business arrangement such as the nature of the work and the start and end dates of the deal. Moreover, since the independent contractor is not an employee, it must be included in the contract that he or she is not eligible for or entitled to employee benefits, such as pension or retirement benefits, health insurance, paid leaves, and other benefits provided by an employer.
Being a necessary document to define job scope and limitations by enumerating partnership terms, not using an independent contractor agreement can be costly. While it allows the hiring company and the contractor to detail expectations and to state agreement terms and conditions, some of the possible consequences of not using it include misunderstanding in terms of payments, financial responsibility for work-related health problems, and lawsuits.
In addition, an independent contractor agreement helps protect both the interest of both parties. If you are a business owner seeking an independent contractor, the agreement shields you from liability issues while protecting your assets and proprietary information. If you are an independent contractor, it assures that you will get paid according to the terms mentioned in the contract and not be taken advantage of.
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The content of an effective Independent Contractor Agreement should provide as much protection as possible to both parties entering the agreement. It must establish expectations and the scope of responsibilities, as well as terms on how the project should be completed and payments.
The specific terms and conditions in the agreement may vary depending on the industry and the kind of products or services the independent contractor will provide. In general, it contains information on the professional or entity being hired and the hirer, the kind of services or products to be provided, the agreement start and end date, why the contractor is not an employee for legal and practical purposes, and the payment terms.
Using PDFRun’s Independent Contractor Agreement, you can create a legally binding contract in minutes. Follow the guide below to fill out the template accurately.
I. Parties requires the names and addresses of both the client and the contractor. It also details the date of payment for the services provided by the contractor.
II. Services Provided requires the list of services the contractor shall provide.
III. Payment requires the payment terms agreed upon by the parties.
IV. Due Date requires the terms or important dates the services shall be completed.
V. Expenses requires the information on whether expenses relevant to the services is shouldered by the contractor or reimbursable by the client.
VI. Liability Insurance requires information relevant to liability insurance.
VII. Termination requires the date of termination of the agreement.
VIII. Option to Terminate gives the client and the contractor terms termination of the agreement.
IX to XIX. Read the agreement terms and conditions to check if they suit your needs.
XX. Governing Law requires the state that would govern the agreement.
XXI to XXII. Read the agreement terms and conditions to check if they suit your needs.
XXIII. Additional Terms and Conditions requires other terms and conditions that the agreement should have.
XXIV. Read the agreement terms and conditions to check if it suits your needs.
To certify the independent contractor agreement, both the client and the contractor should provide their names and signatures and the date they signed the agreement.
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What should be in an independent contractor agreement?
An independent contractor agreement must contain in detail all the terms and conditions about which the parties have agreed. In other words, what will be provided to the independent contractor and what work is expected from him or her must be clearly communicated between both parties before a contract is signed.
No matter if you are an individual providing a service as a freelance writer, a salesperson offering your services, or a company looking for assistance from a consultant, your independent contractor agreement should have the following information:
- The names of the parties to the agreement;
- Details about the payment — amount, frequency, method;
- The service to be provided;
- Work hours and days;
- Travel requirements — if any;
- Insurance requirement — if any;
- Location of work — home, company premises, other address;
- Retirement plan — if any;
- Intellectual property ownership;
- Applicable laws; and
- Arbitration or litigation process in case of disputes.
The agreement should be clear and concise so both parties understand what they are agreeing to do for each other. If any part of the agreement is unclear, additional terms must be included.
What is the purpose of an independent contractor agreement?
The main purpose of an independent contractor agreement is to legally allow an individual or business to provide contracted labor or services in exchange for compensation. This agreement is also used to outline the responsibilities, obligations, and duties of both parties involved in this type of working relationship. It works as a guide so that both parties have a clear understanding of the expectations and rules they must follow. The different types of independent contractor agreements can vary in terms and conditions depending on the size, scope, and type of work being done. It should only be used when one or more activities are being contracted from an individual or business that does not have direct supervision or control over the other party's actions.
The agreement can define what work is to be done, how it is to be completed, and when the final results are to be submitted. It should also include details about payment arrangements, types of work hours or timetables, dress code requirements, and any other conditions that may affect the working relationship between parties. The independent contractor agreement can also include other provisions such as non-disclosure agreements to prevent trade secrets from being leaked and confidentiality clauses that protect the proprietary information of one party. Also, terms can be included which determine who owns any intellectual property created through this type of working relationship.
Is an independent contractor agreement legally binding?
An independent contractor agreement becomes legally binding when both parties sign it. Therefore it may be used during legal disputes as proof that the contractor was hired as a self-employed person and that both parties must adhere to the agreement's terms.
Can I write my own independent contractor agreement?
To have an independent contractor agreement that clearly states your terms and conditions, you may write your own. You can include anything you think is relevant to the transaction. Nevertheless, for your convenience, you can find independent contractor agreement templates online.
Who signs an independent contractor agreement?
Those who sign an independent contractor agreement are the only ones who decide to enter into an agreement and therefore voluntarily accept the conditions and terms of the agreement.
What is a 1099 contractor?
A 1099 contractor is defined as a self-employed individual who enters into a relationship with a client where the contractor provides services to that client for compensation. The 1099 contractor does not work as an employee of the client and is instead contracted through a service company or other agency to provide those services.
A 1099 contractor is called as such because the client who contracts with the contractor is required to provide a 1099 tax form at the end of the year for income reporting purposes. This form documents how much you were paid, and it is your responsibility to report this amount on your individual taxes.
In order to be considered a 1099 contractor, you must have been contracted through an agency or other company. If you are employed directly, then you are an employee and should be reported on a W-2 form, not 1099.
Can you fire an independent contractor?
Yes, you can fire an independent contractor if the contractor does not adhere to the terms and conditions of the contract or agreement. However, in order to terminate an independent contractor for cause, you will need to have a clear and concise contract with your contractor that outlines their duties and responsibilities. Here are some reasons why you can terminate an independent contractor:
- The contractor fails to complete the contracted work within a specified period of time.
- The contractor fails to adhere to the terms and conditions outlined in your contract agreement.
- Failure by the contractor to maintain necessary insurance coverage as required under their contract or failure by you, as the client, to provide proper notice of that requirement i.e. you did not provide the contractor with proper notice that he or she needed to obtain insurance.
- Failure by the contractor to comply with applicable state and federal withholding laws i.e., failure to submit any required federal or state tax returns, forms W-2, 1099.
If you are considering terminating an independent contractor for cause, you must ensure that the above termination reasons are clearly outlined in your contract agreement. If none of the above conditions exist in your contractor agreement, then you may have difficulty terminating an independent contractor with a cause because this will be considered wrongful termination.
Do I need a business license to be an independent contractor?
If you are an independent contractor and not considered as an employee, you are required to have a business license to operate a business. Moreover, every person or business occupying space for the purpose of conducting a trade or business is required to pay a fee and obtain a city license.
Is it better to be on payroll or 1099?
When you are looking at taxes, there is a huge difference between being paid as an employee versus paying yourself as an independent contractor. If you are thinking of starting a business, become an independent contractor in the future, or are currently self-employed, it is important that you know about both options and you consider which one will be most beneficial for your financial situation.
Being an employee and a 1099 contractor are two different things. An employee is a worker who works under the supervision and direction of his or her employer. A 1099 contractor, on the other hand, usually works on his own or without direct control from another person. Their differences include the amount of taxes and other deductions that they pay.
An employee is required to pay between 7% and 50% depending on the state as his or her contribution to Social Security and Medicare — collectively called FICA. On the other hand, a 1099 contractor has to shoulder both employer's and employee's share of the FICA. However, a 1099 contractor is not required to pay his/her share of FICA, unlike an employee who has to save from each salary payment so that the required contributions of both employer and him are already deducted.
In terms of taxes, a W-2 employee is required to declare no matter how much he or she earned from his or her employer for it is the employer's responsibility to declare and withhold the taxes. On the other hand, a 1099 contractor has no employers withholding his or her share of income tax and FICA which means he or she is responsible for paying all these from his pocket. As such, a 1099 contractor who normally has an intention of hiring an assistant must possess a tax identification number in order to issue a 1099-MISC. If the business is doing good, it may also be necessary to give the required 15% of his or her earnings as a deductible contribution under a pension plan so that he or she can have sufficient savings for retirement. A W-2 employee, on the other hand, is not required to pay an additional amount towards his or her retirement.
As mentioned, a 1099 contractor is also responsible for paying FICA that is normally paid by the employer, and income tax which may be deducted from the salary payments he or she receives. However, there are some exceptions; if their earnings for one calendar year are not more than $400 from a single client, he/she doesn't have to pay FICA. Also, even if the earnings are over $600, the 1099 contractor can still get out of paying FICA if his or her client enters into an agreement with him or her that he or she will not claim any exemption or it is not necessary for him or her to pay the FICA. However, under no circumstance is a W-2 employee allowed to issue 1099 even if his or her total earnings are less than $600 during the year.
Do you need a reason to fire an independent contractor?
You cannot just fire an independent contractor. They have rights. If you want to fire an independent contractor, your basis should be that the independent contractor is unable to adhere to the terms and conditions of the independent contractor agreement.
If your independent contractor is failing to adhere, you are totally within your right to let them go. But this needs to be handled very carefully by the hiring company because there are legal implications if it is not done properly. If an independent contractor feels they have been unfairly terminated, they may retaliate with a lawsuit against the hiring company. However, an independent contractor should not be terminated for just any reason or without just cause. If they are terminated, there needs to be a good and valid reason for it. Here are reasons to fire an independent contractor:
- Breach of Independent Contractor Agreement – Your basis should always be that the independent contractor is breaching your contract. This means that the independent contractor becomes a direct legal liability to you, and you have a just cause in firing them.
- Inconsistent with Company Policy – If your company has policies in place which are followed by all of your employees, then if an independent contractor is not following those policies it makes sense for them to be fired. They have to be held to the same standard as your employees, or else they are just another employee who will later sue you for wrongful termination.
- No Longer Needed – Your business plan may change, and you may no longer need that independent contractor's services. If you do not need them anymore then it is perfectly fine to terminate them under this basis. However, if you are firing an independent contractor for any other reason, their termination can be seen as wrongful termination and they may retaliate with a lawsuit against your company.
Can an independent contractor claim unfair dismissal?
An independent contractor can claim unfair dismissal if he or she has been dismissed for unjust reasons.
Is working 1099 worth it?
Working as an independent contractor is beneficial for people who want to start their own business. According to the IRS, someone is an independent contractor when they are in business for themselves and offer services to the general public.
There are many reasons why people work as independent contractors, not least of which is that it gives them more control over how much money they make per hour or day. The downside of working as an independent contractor is that they are responsible for paying their own Social Security and Medicare taxes, which often results in them taking fewer jobs.
Independent contractors also pay their own health insurance, since they are not employed by anyone else. They must purchase this coverage themselves if they do not have the means of providing it through another employment situation.
Does an independent contractor pay more taxes than an employee?
Independent contractors pay more taxes than employees because they have to pay both the employee and employer portions of the payroll tax.
What are the disadvantages of being a 1099 employee?
There are several disadvantages when you are an independent contractor.
You are not an employee of the company, so you have to pay for your own Social Security and Medicare taxes. This is not a significant cost if you have only one client, but it can be significant if you have several or if your income is quite high. You must claim all of your business expenses as deductions on your tax return. You are not paid for your vacation or sick time. You are responsible for providing your own tools, equipment, and materials. In some cases, small companies will reimburse you for the cost of a cell phone or other office equipment as part of your compensation package, but it is very rare that they will pay more than that. You may also be required to cover the cost of travel, parking, and meals, tools and materials, or other expenses.
In addition, you are responsible for your own withholding. If you do not set aside enough money to pay your taxes, penalties and interest can end up costing you a lot more than what a normal employee would have paid in Social Security tax. You are not protected by laws governing minimum wage, overtime, and other labor issues.
How do you end a contractor relationship?
To end a contractor relationship, you simply need to give written notice to the other party. If you are a contractor, then you must give enough time for your employer to find a replacement before you stop working. It is important to note that certain types of contracts have different requirements as there may be more involved in ending a contract than simply giving notice.
Why do I need an independent contractor agreement?
You need an independent contractor agreement to protect yourself and set guidelines as to how the relationship will work.
You probably know that working without an agreement is risky business, but you may not realize just how high the stakes are for both yourself and your client. The lack of a written agreement can lead to unanticipated expenses, time drain, and even legal challenges down the road.
Can you be an independent contractor without a contract?
Yes, you can be an independent contractor without a contract. However, not using a contract or agreement has risks, as it serves as a paper trail to document the business relationship between two parties entering into and agreeing to the terms and conditions of a business relationship.
Nevertheless, if you do not have a contract, it is important to document your business relationship through email correspondence, text messages, and other forms of written communication that memorialize the terms and conditions of the business relationship. If there are any disputes or misunderstandings later on about what was agreed upon orally, the documentary evidence from emails and text messages can be used by the courts to settle such disputes.
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