October 16, 2020
Many companies will need to hire an independent contractor from time to time for a short-term project. While the law doesn’t require a written contract, relying on an oral agreement might spell trouble in the future if there are any misunderstandings about obligations, payment, or the scope of services rendered.
To avoid potential costly mistakes down the line, it’s prudent to get a written independent contractor agreement which will clearly define your business relationship with the contractor you are hiring.
What is an Independent Contractor?
An independent contractor can be anyone who offers their services to the general public as an independent tradesman or professional. Lawyers, accountants, doctors, veterinarians, dentists, plumbers, web-designers, and writers are just some of the many types of professionals usually hired for projects or services as independent contractors.
As independent contractors, they are considered self-employed and the hiring company does not control how they perform their work. Since they are not employees, they are responsible for their own tax obligations, insurance, expenses, etc. Additionally, since contractors are not employees, you or your company cannot dictate the terms of their workflow, cannot prevent them from working for other clients, tell them how to do their job, or control their working days.
That said, each of these professionals could be considered an employee if the details of the work they provide are directly controlled by the person or company which hired them.
You will usually hire anindependent contractor for a specific task or short-term project.
Here are some examples of tasks you might want to outsource to a freelancer:
If you need a graphic designer to create a logo for your company website.
If you need a painter to spruce up your office.
If you need an IT specialist to update your computer security
If you need a marketer to grow your social media engagement
Before you start looking to outsource some of the work to a freelancer, you should be clear about the nature of your future business relationship.
Once you decide on the scope of work and length of time necessary for the completion of the project, you will be ready to start drafting a contract with an independent contractor. Make sure that your written agreement covers every aspect of your business association to avoid ambiguities if you get audited by the IRS in the future.
Of course, if you are not sure how to formulate a legally binding contract, your best bet is to hire a business attorney for help with creating an independent contractor agreement that will cover all your bases.
What is the Difference Between an Independent Contractor and an Employee?
It might be confusing to distinguish betweenan independent contractor and an employee, but it’s worthlearning the differences in order to avoid fines if you are audited by the IRS.
If a worker you want to hire wants to be classified as an independent contractor, they should sign a written agreement specifying that the business association is not an employment relationship--not only for tax purposes, but for compliance with other federal and state employment laws.
Here’s some key differences:
Independent Contractor:
Sends invoices for work/services rendered
Works independently
Responsible for their own taxes, insurance, and expenses
Works with other clients
Uses their own equipment
Responsible for hiring their own assistants or subcontractors
Employee:
Employer is responsible for FICA and other tax withholdings
Employer supervises their work (how, what, when, and where it is performed)
Employer decides what type of work should be done
Employer might offer benefits like health insurance, vacation pay, sick days, pension, etc.
What is an Independent Contractor Agreement?
Anindependent contractor agreement is a written document between an independent contractor who is providing work or services, and an individual or a company who is hiring and paying them for the work or services they provide. The tasks/projects are usually specific and short-term. This agreement should clearly state the business relationship between the hiring company and the contractor, and define why the person being hired is not an employee, for legal and tax purposes.
Here are some of the points that should be addressed in every independent contractor agreement:
WHO is the hiring entity contracting for services or tasks?
WHO is hired to perform services and tasks?
WHAT services or tasks should be provided?
HOW MUCH will the contractor be paid and how often?
WHEN does the job start and how long will it last?
WHY is the contractor not considered an employee?
Once you have included all of these elements, you might want to add a few more, depending on the scope of the projects and tasks contracted:
Insurance (which is the independent contractor’s responsibility)
Indemnification (the contractor is responsible and hiring company is not liable should problems arise)
Expenses (the hiring company is not covering expenses of the contractor)
Fringe Benefits (the contractor is not covered by company’s benefits like sick days, unemployment insurance, pension, vacation pay, etc.)
Warranties (the contractor should have all the necessary licenses, permits, and registrations mandated by the state laws)
An independent contractor agreement might also be referred to as:
Freelance Contract
Freelance Agreement
Independent Consultant Agreement
Contractor Agreement
Why Do You Need an Independent Contractor Agreement?
If you are a company/person hiring an independent contractor, having an agreement will protect your business interests.
The agreement will define exactly what tasks or services need to be provided, how much the contractor is to be paid, and when the work should start and finish. It will protect you from liability if you are taken to court or audited by the IRS, and ensure that you are the legal owner of the property resulting from the work performed by the contractor.
If you are an independent contractor, the agreement will protect you if you don’t receive the promised compensation. Having a contract when bidding for freelance jobs will also make you appear more reliable and professional, showing your determination to provide specific work in a certain timeframe.
If you need a long-term project or a series of tasks/services to be performed over an extended period of time, you might be better off with an employee contract.
If you are not clear which type of business contract you should create, consult a business attorney or small business lawyer who will help you decide the best course of action to protect you in the future, in accordance with your state’s laws.
BizCounsel specializes in exactly this--providing the expert legal help and guidance your business needs to make sure you’re not only working within the law, but also that your contracts are structured to protect you and your business.
Are There Advantages in Working with an Independent Contractor?
As an employer, you have certain obligations towards your regular employees, and hiring an independent contractor might lessen the financial and legal burden for the duration of the project.
Here are some advantages of hiring a freelancer:
You are not responsible for FICA or other taxes
You do not have to offer any benefits (pension, health insurance, sick days, vacation pay, etc.)
You pay per project, which is stated clearly in the agreement
You don’t have to supervise and micromanage their work and their timing
There is less red-tape
It’s easier to find a short-term help than a long-term employee
Summary
Hiring a freelancer for a short-term project is an easy way to solve your business’s immediate needs. Even though you are not required by law to have a written contract in place, creating an independent contractor agreement that will protect your interests in the long run will bring you a peace of mind and ensure that all your bases are covered.
Independent contractor agreements are important, and even if you stay up all night trying to figure out all the requirements you need to include in each clause, you’re likely going to miss a little detail that ends up making a big impact later on.
This is where BizCounsel comes in. BizCounsel’s expert legal attorneys are at your disposal to help you solve legal issues, draft custom documents, and provide tailored services all for one low monthly fee.
Take the stress out of handling your business’s legal needs and get started with BizCounsel today!
Sources:
https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-defined
https://www.investopedia.com/terms/i/independent-contractor.asp
