The ultimate guide to independent contract work
Considering a freelance work? Rights and responsibilities between freelancers and their clients are different than those between employees and employers. Understanding these differences can help you navigate the world of self employment and avoid future legal problems.
Defining independent contractors vs employees
Employees have some type of contract with their employer. Most workers have very little input into the terms of this agreement, although people accepting senior positions often have room to negotiate. Once hired, your employer:
Can tell you what hours to work
Can train you on your job and expect you to follow procedures
Must provide you with the tools you need to do your job
Must reimburse you for any personal supplies you use for work (car, uniform, etc)
As an independent contractor, you have a contract with your client. It may be oral or written, and you have more control over its terms and your relationship with your client.
You decide when to work and how to get the job done. Your client can’t dictate your hours or require training.
You use your own tools (computer, software, car, etc.). Your client doesn’t have to pay for them, but they are usually tax deductible.
You set your own project fee or hourly rate.
On-demand gigs: Employee or freelancer?
On-demand gigs may seem like a pretty clear case of independent contractors choosing their own work. The companies act as intermediaries, connecting willing workers with people who have a short-term need like a ride or a place to stay for a weekend. Workers accept “jobs” as they see fit.
Many of these companies, including Uber, Lyft, and Airbnb, classify their workers as independent contractors.
But, not everyone agrees. Some (usually smaller) companies that provide on-demand services, like food delivery or grocery shopping, have classified their workers as employees. This allows them to train their workers to provide a consistent experience for customers.
For now, if you choose to do this kind of work, make sure you know how the company you sign up with classifies its workers.
When you’re self-employed, you trade in some of an employee’s rights for the freedom of being your own boss. Employee rights include
- Overtime pay
- Protection from discrimination
- Unemployment insurance
- Minimum wage
- Workers compensation benefits
Employers also pay a portion of employees’ Social Security and Medicare taxes. They may also offer other benefits, like health insurance or paid time off, which they don’t have to offer to freelancers.
Your rights as an independent contractor are simple—to expect your client to abide by your contract and pay you as agreed.
Independent contractors have fewer rights but more responsibilities. Not only do you have to find your own clients, you have to track your income and expenses carefully, so your business taxes are accurate.
Independent contractors are required to:
Report all income. If a you received over $600 in a year from a client, they will send you a 1099 tax form.
Make quarterly estimated tax payments. This is the self-employment version of paycheck tax deductions.
Pay the full amount of Social Security and Medicare taxes. This is often called the self-employment tax.
Track expenses so you can make legitimate business deductions
As an employee, your income and taxes are much simpler. At the end of the year you get a W-2 detailing your salary, taxes withheld, and any other paycheck deductions. You fill out a W-9 and your employer withholds income taxes, including your share of Social Security and Medicare taxes.
When to incorporate
At some point, many freelancers wonder if they should incorporate or just operate as a sole proprietor.
Sole proprietorship is simpler. If you work as yourself, using your own name, you don’t have to do anything special. Just report your freelance income on your personal tax return.
If you want to use a business name—something different from your own legal name—you’ll file a “doing business as” declaration. This lets the public know that you are the person behind your business’ name.
Your other option is to form a separate business entity, either a limited liability company (LLC) or a corporation. The LLC is a popular option for freelancers, because it’s more flexible and requires less paperwork than a corporation.
An LLC may offer some advantages over a sole proprietorship:
Your personal assets are protected from your business’ debts.
If you hire employees, only your business can be held liable for their actions.
LLCs can choose to be taxed as an S-corporation, which may save on taxes.
These protections aren’t absolute. If you are negligent in performing the work, you could be personally liable for any negative impacts on your client. You may also forfeit the personal assets protections if you’re not careful about keeping business and personal finances separate.
Depending on your industry and preferred clients, you may find it easier to find work if you form a business entity. Many large companies prefer to work with other companies rather than individuals.
Getting professional help
If you choose to incorporate, your lawyer can help you file the paperwork and may be able to act as your registered agent. They can also review your contractor agreement or create a customized contract for you.
If you'd like to create an agreement yourself, you can use Avvo's free consulting agreement template to get started.