What Is an Independent Contractor?

An independent contractor refers to an individual or a business entity hired by another party to carry out a specific task or provide a service based on a contract they have both agreed to. Unlike employees, independent contractors are classified as not being the employer's employees and are generally engaged on a day basis or for a definite term. They can go at their own pace and handle the different tasks whenever they want and wherever they want.

In contrast to staff, independent contractors are required to pay their own taxes, including the federal tax and self-employment tax, because they are not contributing into FICAR and they are not entitled to any employee benefits. Besides that, independent contractors have the personal resources and equipment required to perform the contracted assignment.

Example

The one suitable for an independent contractor is a freelance designer hired by a marketing agency to create a range of advertising materials for a client. Here, the graphic designer is seen as a freelance professional who is not related to the agency using a contract of work.

A designer acts as a principal interlocutor between the agency and the designer deciding among the range of tasks, deadlines, and fees of the project. They have the opportunity to work from home without the need for office, computers, and software which will be provided by others. The agency simply does not force the designer to limit the number of hours worked or the commission demanded in addition to failing to cater the employees over statutory benefits like health insurance and paid time off.

Upon the project's end, the graphic designer sends the invoice to the agency regarding the amount. Being an independent contractor, their responsibility is not only in collecting their own tax but also income-tax and self-employment tax, based on the income they get from the project.