The gig economy has experienced rapid growth over the past decade, reshaping the modern workforce landscape. This shift has paved the way for a surge in independent contractors; professionals who operate outside traditional employment structures to offer specialized services on a project-by-project basis. In the United States alone, a 2022 survey found that around 59 million individuals were working as independent contractors, making up 36% of the entire U.S. workforce.

With this growing trend, businesses and aspiring freelancers alike need to understand what it means to be an independent contractor and whether it equates to being self-employed. This article delves into the intricacies of what defines an independent contractor, explores the differences between contractors and traditional employees, and clarifies whether independent contractors are classified as self-employed.

Who Exactly is an Independent Contractor?

An independent contractor is a professional who offers their services to various clients or companies on a freelance basis. These contractors work independently, without forming part of a company’s in-house workforce. As a result, they have the freedom to determine their own work hours, set their rates, and choose how they deliver services to their clients.

Independent contractors can work in various fields, from software development and graphic design to healthcare services and legal consultancy. For example, a freelance writer who collaborates with multiple publications or a tech specialist hired for a specific software project would both be considered independent contractors.

Read More: Top 7 Benefits of Hiring Independent Contractors in 2024

What Sets Independent Contractors Apart from Employees?

The U.S. labor laws use a few key criteria to differentiate between employees and independent contractors. Below are the three main distinctions:

1. Level of Control Over Work
   Independent contractors enjoy considerable freedom in deciding how to perform their work. They control their schedule, choose their tools, and even decide where they work. Conversely, employees must adhere to a set schedule and follow the employer’s instructions on how tasks should be completed.
2. Nature of the Working Relationship
   Independent contractors operate based on contractual agreements that specify project scope, deliverables, and payment terms. These contracts can be for short-term projects or ongoing services. In contrast, employees are bound by employment agreements that outline salaries, benefits, and other employment terms that reflect long-term commitment and adherence to the company’s policies.
3. Behavioral Supervision
   Independent contractors work autonomously, with minimal supervision from clients. They are typically evaluated based on the results they deliver rather than the processes they use. Employees, however, are often subject to close monitoring and performance reviews by their supervisors.

What Does “Self-Employed” Mean?

Self-employment refers to a state in which an individual runs their own business and isn’t directly employed by another company. In the U.S., the Internal Revenue Service (IRS) considers a self-employed person to be anyone who operates a trade or business, either as a sole proprietor or an independent contractor. Being self-employed also includes partners in a business or individuals working for themselves on a part-time or full-time basis.

Self-employed individuals are responsible for handling their own tax payments, maintaining insurance coverage, and managing their business operations. This means they can deduct certain business expenses to reduce their taxable income, such as costs related to office space, tools, and professional services.

Types of Self-Employed Business Structures

Self-employed individuals have the flexibility to choose the business structure that best suits their needs. Below are some of the most common business structures:

• Sole Proprietorship: A simple business model where an individual operates an unincorporated business by themselves.
• Partnership: A structure in which two or more individuals share ownership of a business, including profits, losses, and decision-making responsibilities.
• Limited Liability Company (LLC): A hybrid business structure that offers the liability protection of a corporation while providing the tax benefits of a partnership.
• Corporation: A separate legal entity that is distinct from its owners. Corporations can be classified as C or S corporations, depending on their tax treatment and structure.

Choosing the appropriate business structure is essential for managing tax obligations and legal requirements effectively.

Independent Contractor vs. Self-Employed: How Do They Differ?

While many people use the terms “independent contractor” and “self-employed” interchangeably, there are subtle differences between the two:

1. Business Entity and Legal Status
   Independent contractors might not necessarily own a formal business entity, whereas self-employed individuals often operate under business structures such as sole proprietorships or LLCs. Independent contractors are seen as service providers rather than separate business entities.
2. Tax Deductions and Financial Responsibility
   Both independent contractors and self-employed individuals have to handle their own tax payments. However, self-employed individuals may deduct a broader range of business-related expenses such as rent, insurance, and utilities.
3. Licenses and Permits
   Depending on the nature of their work, independent contractors and self-employed individuals may need specific licenses or certifications. For instance, a self-employed financial advisor might need a particular license, whereas an independent software developer may not.

Learn More: Understanding the Key Differences: Independent Contractor vs. Self-Employed

Tax Implications for Independent Contractors

Independent contractors must adhere to specific tax regulations. They are considered self-employed for tax purposes, which means they are responsible for paying self-employment tax; covering both the employer and employee portions of Social Security and Medicare taxes.

Contractors can reduce their tax liabilities by deducting certain expenses, such as travel costs, office supplies, and marketing expenses, directly associated with their business activities. Understanding and properly managing these deductions is crucial for maximizing income and staying compliant with tax laws.

Quick Read: Employee vs. Contractor Misclassification

Is an Independent Contractor Considered Self-Employed?

Yes, independent contractors are classified as self-employed. This is because they offer their services independently and manage their business operations without the oversight or direction of an employer. However, not all self-employed individuals operate as independent contractors. For instance, a freelance artist who sells their artwork online is self-employed but might not have a contract with a specific client like an independent contractor would.

Planning to Hire Independent Contractors? How Gloroots Can Help

If you’re considering hiring independent contractors, it’s essential to manage contracts, ensure compliance, and handle payments efficiently. Gloroots provides a streamlined platform to manage your entire contractor lifecycle; from recruitment and onboarding to compliance and payroll. Our platform simplifies the process of hiring and managing independent contractors, helping you stay compliant with regulations while offering your team a seamless experience.

FAQs

1. Is a 1099 form considered self-employed?
   
   Receiving a 1099 form means that an individual is being paid as an independent contractor, which classifies them as self-employed for tax purposes.

2. Is an independent contractor a type of employee?
   
   No, independent contractors are not employees. They provide services independently and are responsible for their own business operations.

3. Who does the IRS consider self-employed?
   
   The IRS considers anyone self-employed if they carry on business as a sole proprietor, an independent contractor, or a partner in a business.

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