Definition of independent contractor

Depending on the industry, independent contractors may also be referred to as freelancers, gig workers, extended workers, on-demand workers, 1099 workers or contingent workers. No matter what name they go by, they fill an important role in a robust talent strategy.

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What is an independent contractor?

Independent contractors are usually temporary or contracted workers used for a specified period of time or for a defined project. According to the IRS, independent contractors are self-employed individuals or entities. Therefore, they pay their own Social Security and Medicare taxes vs. your business having to withhold taxes from their payments (Read How to File 1099 Taxes.) 

Although there are multiple factors involved, the IRS distinguishes an independent contractor from an employee as follows:

“The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and NOT what will be done and how it will be done.”

These highly skilled workers fill critical needs in the workforce, providing services such as translation, tutoring, marketing, IT services and more. As a best practice, they are covered under an independent contractor agreement provision that details:

  • Scope of work

  • Duration

  • Location and timing (if an in-person job)

  • The amount they'll be paid for the job

  • Payment terms (e.g., Net 15 days, Net 30 days)

At the end of the engagement, the independent contractor leaves the role and can be retained by another company or even by the same business again. Of course, the worker can also engage with multiple businesses at the same time.

Examples of independent contractors

Businesses use independent contractors in a wide range of industries, from trucking and logistics to creative talent services, and even the health and medical industry.

Here are some common types of independent contractors:

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The difference between independent contractors and W-2 employees

The biggest difference between independent contractors and W-2 employees lies in the roles an independent contractor is assigned and how they are managed. An employee is hired to work for the business every day and for whatever their assigned responsibilities are, as per their job description. Those parameters are determined by the employer. 

In addition, employees are afforded certain benefits, such as health insurance, and the employer must deduct necessary taxes, such as income tax and Social Security. Employees also have the benefit of reasonable job security.

On the other hand, an independent contractor manages how they do their work and when they do it. When you hire an independent contractor, you don't usually have to withhold income tax, Social Security or Medicare taxes from their pay. They pay their own taxes and health care.

Independent contractors can also be let go at the end of their contracted period with no ramifications. If the business was not satisfied with the worker’s job performance, they simply don’t renew the worker’s contract.

Finally, employees get paid on a regular cadence while contractor work is generally paid one time or on-demand, depending on the terms laid out in the statement of work or independent contractor agreement. The amount owed to an independent contractor is based on the arrangement you have with them for your project vs. a specific amount paid every two weeks or every month, as you would pay an employee. 

The benefits of independent contractors

Independent contractors give you access to specialized skill sets your in-house talent may not have, and with very short notice, which means you can scale quickly to meet increased business demand or scale back easily when there is less work. While contractor availability and skill sets vary from industry to industry, many of the advantages to using independent contractors are the same across the board:

  • Faster onboarding, faster to work

  • Specialized skill sets

  • No benefit requirements 

  • No severance fees or exit packages 

Independent contractors can help your business by working on one-off projects or you can embed them within your team for longer assignments. Many companies use independent contractors extensively as part of a cohesive staffing approach and build professional relationships with their independent contractors.

Independent contractors and taxation

For accurate tax reporting, businesses provide a 1099 form to the contractor by January 31st of the following year, stating all payments totaling in excess of $600 for work that was completed throughout the prior tax year. While taxes are filed on an annual basis, it's important to note that the contractor is still responsible for paying estimated taxes on a quarterly basis in order to avoid penalties.

A better way to onboard, verify, manage and pay independent contractors

While many businesses manage the entire contractor lifecycle using outdated manual processes, forward-thinking entities opt for platforms that can help automate many of these tasks. From initial onboarding requirements to efficiently managing assignments to timely payments, businesses face administrative burdens as well as the need to stay compliant. Using an independent contractor management system like WorkMarket can help simplify all this by giving you visibility every step of the way.

Through contractor self-onboarding workflows, certifications, background checks and drug tests are all centrally located in one system. WorkMarket helps you verify tax ID, W-9 and banking information so you can put people to work more quickly. Furthermore, clients can create Labor Clouds on WorkMarket, organizing talent by specified criteria to make it easier to quickly identify the right workers for the right jobs.

Independent contractor management systems can also help you easily send work assignments to an individual or groups of workers. You can even approve the work and initiate pay - all on the same platform, without managing these tasks through multiple tools. Invoices are automatically generated on behalf of workers, and you get an audit trail to assist with compliance. At year-end, WorkMarket will automatically prep 1099-NEC forms for clients and their workers, ensuring they’re filed with the IRS and applicable state agencies.

A company’s independent contractor expenses typically fall under general expenses for the department utilizing the contractors. This can create a lack of visibility for other key portions of the business - such as HR or payroll - and can pose compliance risks. That is why many organizations will utilize technology like WorkMarket to track and monitor contractor payments.

Working smarter with independent contractors

To reap the full benefits of working with independent contractors, it’s critical to use an independent contractor management system that helps streamline the often time-consuming manual tasks associated with worker onboarding and verification, assignment management, talent organization, and payment processing. WorkMarket is the all-in-one system to manage your independent contractors, efficiently and compliantly.

Realize the full potential of independent contracting today. Get in touch with sales.