Independent Contractor
A self-employed person who provides services to clients under contract, handling their own taxes rather than being on payroll.
Definition
An independent contractor is a self-employed individual who performs work for clients under a contract or agreement rather than as an employee. Contractors control how and when they do the work, use their own tools and processes, and typically serve multiple clients. In the US, clients who pay a contractor $600 or more in a year report those payments on Form 1099-NEC instead of a W-2, and no taxes are withheld from the payments.
Because nothing is withheld, contractors are responsible for their own income tax and self-employment tax (the contractor pays both the employer and employee portions of Social Security and Medicare, currently 15.3% on net earnings). Most contractors handle this through quarterly estimated tax payments. The classification line matters: if a client controls your schedule, supervises your work day-to-day, and you work only for them, the IRS may view you as a misclassified employee, which creates back-tax and penalty exposure for the client.
Why It Matters
If you freelance or run an agency, contractor status defines your entire financial setup. You invoice for your work instead of receiving a paycheck, which means you control your rates and terms, but you also carry the gaps: no withholding, no employer-paid benefits, and a self-employment tax bill that surprises many first-year freelancers. Pricing your services without accounting for that extra 15.3% is one of the most common ways new contractors underprice themselves.
It also matters on the hiring side. When your agency brings on subcontractors, you need signed agreements, collected W-9s, and 1099-NEC filings each January. Treating a de facto employee as a contractor to save on payroll taxes is a misclassification risk that can cost far more than it saves.
Examples
- 1
A freelance designer bills a client $8,000 over the year and receives a 1099-NEC in January; she sets aside roughly 30% of each payment for income and self-employment taxes.
- 2
A web developer charging $95/hour adds about $14/hour mentally for self-employment tax when comparing his rate to a salaried offer.
- 3
An agency hires a contract copywriter at $2,500/month but dictates her hours and gives her a company email; their accountant flags it as a misclassification risk.
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