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Independent Contractor Agreements
Provided that the relationship and scope of work between them and the company is clearly outlined before the commencement of a project, independent contractors can help a company to save money on employment taxes. A great way for independent contractors to outline the relationship and scope of work between them and a company is using an independent contractor agreement.
What is an independent contractor agreement? A simple agreement between a company and an independent contractor, independent contractor agreement is usually used when a company or an individual is hired to a short term task or a specific project. Generally, the following things are revealed by a simple independent contractor agreement:
- Who is being hired and by whom
- When will the relationship start and end
- What services will be provided
- Why the contractor isn’t an employee for practical or legal purposes
- How the contractor will be paid
The aforementioned things are some of the basic things included in an independent contractor agreement. Depending on the hiring company and the contractor being hired, more things may be included in the contractor agreement. Nonetheless, the aforementioned things are what an independent contractor agreement generally includes so to draft a contractor agreement, you’ll need to find out about them. Let’s now take a detailed look at a simple independent contractor agreement and what it entails.
Understanding independent contractor agreement
A written contract between two parties, an independent contractor agreement is used for a specific service or project. To complete a task or project, one company hires another company for a short period using an independent contractor agreement. It’s important that you don’t confuse an independent contractor agreement with an employment agreement because unlike the latter, the former clearly states why the individual or company being hired is not an employee for tax or legal purposes. Generally, the following basic elements are included in an independent contractor agreement.
The hiring company or the company requiring the services is the most basic thing that an independent contractor agreement reveals.
In addition to the hiring, another basic thing revealed an independent contractor agreement is the individual or company being hired for the project or task at hand.
The services being provided are important information revealed by the contractor agreement. The services being provided include the description of the work product to be delivered or the specific task to be performed.
Important information revealed by the independent contractor agreement, the compensation shows how much and often the party being hired will be paid.
The effective date shows when the starting and ending date of the agreement
Termination reveals whether the company that is hiring can end the contract at will (at any time). Additionally, it shows how many days written notice is required beforehand.
This part of the agreement clearly states that the contractor isn’t eligible for any of the hiring company’s employee sick pay, vacation pay, health benefits, pension, or unemployment benefits.
This part of the independent contractor agreement shows that the contractor can hire assistants but their pay and other expenses will be the responsibility of the contractor and not the hiring company.
The aforementioned things are the basic elements of an independent contractor agreement. In addition to the basic elements, the contractor agreement may address legal details as well. Following are the legal details the document may show.
This legal detail shows that without prior written permission, neither party is allowed to transfer the right to get the complete or get paid to another party.
This shows that even if another company or person takes over the contractor or the hiring company, the agreement will still be in effect.
This shows that previous agreements are no more valid and that a written amendment should be used for any future changes.
This shows that unless the hiring company pre-approved certain expenses and invoices are submitted, each party is liable for their own out-of-pocket expenses.
This shows that the state law that will be applied in case there’s any trouble.
This shows that the contractor will be responsible and will have to save the hiring company from any liability in case any problems arise.
This shows that the contractor is responsible for their own insurance and the insurance policy of the hiring company does not cover them.
This states that all notices must be written and delivered in an appropriate manner.
This shows that the power and authority to enter a binding agreement is with both the parties i.e. the hiring company and the contractor.
This part of the agreement shows that if a part of the agreement becomes invalid, the rest of the contract will still remain legal or valid.
This states that to release a claim or right, the contractor of the hiring company must do it in writing.
This part of the independent contractor agreement shows the acknowledgement of the contractor that it has all the registrations, permits and licenses required to complete the project or task at hand.
There you have it—the basic elements and legal details included in an independent contractor agreement. With that understood, it’s time to turn our attention to who an independent contractor is and why a written independent contractor agreement is required.
Who is an independent contractor?
You probably already have a basic idea of who an independent contractor is but here we’re going to discuss the independent contractor in a bit more detail. The alternate of a permanent employee, an independent contractor works independently and isn’t eligible for any employee benefits. Also, the contractor is required to pay taxes such as income tax and other payroll taxes at the self-employed rate. Unlike an employee, an independent contractor can choose how to perform and complete the task or project and also where to perform it.
For withholding taxes and payroll taxes purposes, the internal revenue service (IRS) differentiates between an employee and an independent contractor. As defined by the IRS, an independent business person who runs his or her own business but does work for another is known as an independent contractor. On the other hand, a person hired by a company to perform specific task at the direction of the employer is known as an employee.
Withholding the Social Security or Medicare taxes of employees and paying an equivalent amount to the SSA is what employers are generally required to do. However, if the employed person is an independent contractor, the employer isn’t required to withhold any social security or Medicare taxes and the responsibility of paying these taxes falls on the independent contractor himself.
Why an independent contractor agreement is required
Now that we’ve understood who an independent contractor is and what’s the difference between an employee and an independent contractor, it’s time for us to take a look at why an independent contractor agreement is required.
The best time to clarify the independent contractor agreement is at the start of a work arrangement. Also, the best way to clarify the agreement is in writing. Not writing down the agreement means that you’re working based on assumptions and we all know that working on assumptions can be a very dangerous this. If you work on assumptions, you may have to suffer from time consuming and costly litigation later.
If you agreement isn’t in writing, you’re likely to invite costly misunderstandings. The reason for this is simple: when there’s no clarity of what the independent contractor or the hiring company has agreed to, how much is to be paid and what the course of action will be in case a dispute arises, costly misunderstandings are bound to happen.
The aforementioned misunderstandings could either be innocent misunderstandings meaning the contractor and the hiring company remembers the agreement differently or they could be intentional. Regardless of whether the misunderstandings are innocent or intentional, they can cause a lot of harm so avoiding them is a sensible thing to do. What the best way to avoid the misunderstandings? Yes, you guessed it right: by writing down the agreement.
Compared to oral agreements, written documents are safer and provide better clarify of what has been agreed. More importantly, by showing the internal revenue service that both the hiring company and the contractor intended to create a contractor/hiring company relationship rather than an employee/employer relationship, a written independent contractor agreement helps a worker to establish an independent contractor status. In short, there is no point of an independent contractor agreement if the hiring company treats the contractor as an employee.
Understanding the important parts of the simple independent contractor agreement
Many things are included in an independent contractor agreement. This is something you’ll see when you look at an independent contractor agreement template. However, it is important for you to keep in mind that some parts of the contractor agreement are more important than the others. These parts are what we’re going to discuss in the section.
A statement by both the independent contractor and the hiring company detailing what each will do is the first thing you’ll notice in the independent contractor agreement. An example of this is that the company agrees to pay the contractor for certain tasks and the contractor agrees to complete the task as required. Other important things that this part of the agreement should show includes the nature of work and exactly what the contractor will be doing in detail. If applicable, it may also show the product to be provided and when and how it will be provided. Following are some important things to keep in mind when drafting an independent contractor agreement or filling out an independent contractor agreement form.
Independent contractor status
An extremely important part of the agreement, independent contractor status shows that the worker entering the business relationship is an independent contractor and not an employee. It shows the following rights of the contractor:
- Performing services for others unless the work performed there conflicts or competes with the work being done for this company
- Controlling and directing how and where is to be performed
- Hiring assistants or using their own employees to complete the task at hand
In addition to the aforementioned things, this part of the agreement provides details of the training received by the contractor. As he or she is a professional, the training acquired by an independent contractor is minimal. Also, the training details provided usually include specifics of the work to be done for this company.
Who pay taxes?
This has already been touched upon but there’s no harm in re-iterating it. This part of the agreement shows that the employer hasn’t withheld any social security taxes from the payment to the contractor and the responsibility of paying these taxes falls on the independent contractor himself. Additionally, this part shows that the company will not pay state or federal workers compensation fund payments or unemployment compensation contributions on the behalf of the contractor. Just like the social security taxes, the payment of these taxes is the responsibility of the contractor.
Eligibility for benefits
This part of the agreement shows that the independent contractor isn’t eligible for any of the hiring company’s employee sick pay, vacation pay, health benefits, pension, or unemployment benefits. In addition to showing the contractor’s eligibility for benefits, this part of the agreement will clarify that the hiring company’s liability insurance policy will not cover the contractor.
Termination of contract
This part of the agreement should state that with or without notice, either party may terminate the agreement.
There you have it—everything you need to know about independent contractor agreement. If you’re still confused about what an independent contractor agreement, you can refer to an independent contractor agreement template.
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