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What is an Independent Contractor?
An Independent contractor is basically a self-employed person or brand. Although most of the people working in public jobs such as lawyers and accountants come to mind, every self-employed person can work as an independent contractor.
It is critical that business owners correctly determine whether the individuals providing services are employees or independent contractors. 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. You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if you are given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed.
The earnings of a person who is working as an independent contractor are subject to Self-Employment Tax.
How to Become an Independent Contractor?
First of all, you have to ensure you really are an independent contractor. And then you must get a tax registration. Don’t forget, if you are an independent contractor, you are self-employed. The process to become an independent contractor is pretty straightforward.
Here’s what you need to do:
To find out what your US tax obligations are, check the “Independent Contractor Taxes” section.
Independent Contractor Taxes
As a self-employed individual, generally, you are required to file an annual return and pay estimated tax quarterly.
The IRS website states that:
“Self-employed individuals generally must pay self-employment tax (SE tax) as well as income tax. SE tax is a Social Security and Medicare tax primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. In general, anytime the wording “self-employment tax” is used, it only refers to Social Security and Medicare taxes and not any other tax (like income tax).”
You must pay SE tax and file Schedule SE (Form 1040 or 1040-SR) if either of the following applies.
SE Tax Rate - The SE tax rate on net earnings is 15.3% (12.4% social security tax plus 2.9% Medicare tax).
Maximum earnings subject to SE tax. Only the first $132,900 of your combined wages, tips, and net earnings in 2019 is subject to any combination of the 12.4% social security part of SE tax, social security tax, or the Tier 1 part of the railroad retirement tax. All your combined wages, tips, and net earnings in 2019 are subject to any combination of the 2.9% Medicare part of SE tax, Medicare tax, or Medicare part of the railroad retirement tax. If wages and tips you receive as an employee are subject to either social security or the Tier 1 part of the railroad retirement tax, or both, and total at least $132,900, do not pay the 12.4% social security part of the SE tax on any of your net earnings. However, you must pay the 2.9% Medicare part of the SE tax on all your net earnings.
Independent Contractor Tax Deductions
Independent Contractor Insurance
Social security benefits are available to self-employed persons just as they are to wage earners. Your payments of SE tax contribute to your coverage under the social security system. Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits.
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What is the difference between an employee and an independent contractor?
Employees, in general, will not have much control over the type of work they will do. However, employees will have the benefits and the stability of a full-time job. Health care is often the most sought-after benefit. A contractor is not entitled to any benefits from an employer. Independent contractors do have more benefits when it comes to taxes. If they use their own tools or materials for the work they do, they can deduct those expenses from their taxes each year.
Who qualifies as a 1099 contractor?
A 1099 contractor is a person who works independently rather than for an employer. There are significant differences in the legalities of a contractor and employee. While the work can be similar in nature, it is important to follow the law with regard to taxes, payments, and the like. Forms 1099 and W-2 are two separate tax forms for two types of workers. Independent contractors use a 1099 form, and employees use a W-2.
What are the criteria for an independent contractor?
Make sure you really qualify as an independent contractor. Choose a business name (and register it, if necessary). Get a tax registration certificate (and a vocational license, if required for your profession). Pay estimated taxes (advance payments of your income and self-employment taxes).