Who Is An Independent Contractor? – Importance, Functions, And More

0
250
Who Is An Independent Contractor?

If you are a self-employed person or run an entity to perform work or provide services under a contract to another individual or an entity, then you are an independent contractor. Since independent contractors work independently, they have to pay their Contractors insurance, Social Security taxes and Medicare taxes on their own. The IRS (Internal Revenue Service) considers the earnings of an independent contractor under the rules of self-employment tax.

Since independent contractors work independently, they have to pay their Contractors insurance, Social Security taxes and Medicare taxes on their own.

In this article, you will learn about independent contractors in general and which professions come in this category. In addition to that, you will also learn how an independent contractor works and performs services. Furthermore, we will also discuss how such an individual pays taxes to the IRS. Finally, we will share with you some of the major pros and cons of becoming an independent contractor. Hence, to learn more, read on through to the end of the article.

Contents

Who Is An Independent Contractor?

Who Is An Independent Contractor

According to the IRS,

People such as doctors, dentists, veterinarians, lawyers, accountants, contractors, subcontractors, public stenographers, or auctioneers who are in an independent trade, business, or profession in which they offer their services to the general public are generally independent contractors. However, whether these people are independent contractors or employees depends on the facts in each case.

Basically, if an individual is an independent contractor, the person who is paying has only the right to control or direct the result of the work. The payer cannot control or influence what is done or how it is done. In most cases, independent contractors are self-employed, and hence, the earnings they make are subject to self-employment taxation.

If an individual or an entity is consuming the services of an independent contractor, they need to offer employment benefits like health insurance and retirement accounts. This is because independent contractors are, by nature, self-employed individuals or freelancers. Hence, it is essential for a payer to classify a service provider as an independent contractor or an employee.

If you perform services that an employer controls, you do not fall into the category of an independent contractor. This applies even when you have the freedom of action. In employment, your employer has the right to control how you perform your services.

How Does An Independent Contractor Work?

How Does An Independent Contractor Work

An independent contractor offers labor or services to another entity or an individual. However, the service provider here is not under any employment. The person in question is self-employed. They pay taxes as per the self-employment taxation rules of the IRS. Hence, these individuals do not receive the same rights and benefits that employees receive. They are responsible for their own retirement plans, health insurance, and other benefits.

According to Business News Daily,

Independent contractors differ from traditional employees who’ve gone through a company’s hiring and onboarding process. The company pays its contractors, but contractors aren’t employees. Instead, independent contractors are self-employed […] they can operate and work for several clients simultaneously. Companies often use independent contractors to avoid hiring staff for short-term needs.

You are an individual entity if you work as an independent contractor. Although you will not get employment benefits, you are sure to have other benefits working as such. You will have the freedom to work on your own terms. You can set your own hours, rates, and availability to customers.

However, on the other hand, you are the one who is responsible for paying your own taxes. In other cases, you will also not likely receive the protections that an employee in general receives through labor laws. Hence, it is important for you to keep track of your earnings and include every payment details that you have received from your clients.

How Does An Independent Contractor Pay Taxes?

Since an independent contractor is considered a self-employed individual, the individual thus needs to follow self-employment taxation rules. You will have to report your income through Form 1040 of the IRS.

According to Investopedia,

In the United States, independent contractors are considered sole proprietors or single-member limited liability companies (LLCs). They must report all their income and expenses on Schedule C of Form 1040 or Schedule E if they have profits or losses from rental properties. Further, they must submit self-employment taxes to the IRS, usually every quarter, using Form 1040-ES.

However, since many independent contractors are sole proprietors, they do not necessarily pay taxes on their gross earnings. For various business expenses, independent contractors can reduce their overall tax obligation. The taxes are due on the net income, that is, the difference between gross earnings and business expenses.

Pros And Cons Of Becoming An Independent Contractor

The following are the major pros and cons of an independent contractor:

Pros

Here are the pros of becoming an independent contractor:

  1. Greater freedom on type and procedure of work.
  2. You can work by setting your hours and can work on what you love.
  3. If you have a specific place for your home office, you can avail of a home office tax deduction.
  4. You have complete control over building your business on your own terms.
  5. You can hire as per your needs.
  6. You choose the clients whom you work with.

Cons

Here are a few cons of becoming an independent contractor:

  1. You have a risk of going bankrupt.
  2. You will have to bear the opportunity cost of a regular career.
  3. You do not have a regular source of income.
  4. Your income fluctuation can undermine your loans.
  5. There are no employment benefits.

Final Thoughts

Hope this article was helpful for you in getting a better idea of who is an independent contractor and how these individuals work. Basically, independent contractors are not employees, and hence they are not eligible to receive employment benefits. They are self-employed individuals and pay only self-employment taxes to the IRS.

As an independent worker, you cannot withhold taxes from your paychecks. However, you can pay your estimated income taxes in advance through quarterly payments. You can also reduce your gross income with business deductions to lower your tax bills. Do you have more suggestions on how to pay taxes? Share your ideas with us in the comments below.

Continue Reading:

LEAVE A REPLY

Please enter your comment!
Please enter your name here