What is an Independent Contractor?
An independent contractor is a person or entity hired on an as-needed basis to provide goods or services. They are also referred to as freelancers. Because independent contractors are not considered employees, the hiring company is not required to withhold or pay any taxes on payments made to independent contractors.
How Independent Contractors Work?
1. Contractual Agreement: Work is based on a specific contract outlining the terms and scope of the project.
2. Autonomy: They operate independently, managing their own schedules and work processes.
3. Self-Employment: Responsible for their own taxes, including self-employment tax.
4. No Employee Benefits: Do not receive employee benefits such as health insurance or retirement plans.
5. Project-Based: Typically hired for specific projects or tasks rather than ongoing employment.
6. Varied Clients: Often work for multiple clients simultaneously.
7. Payment: Usually paid per project, hourly, or by deliverable, rather than receiving a regular salary.
8. Tools and Resources: Provide their own tools, equipment, and resources needed to complete the work.
9. Risk and Liability: Assume more financial risk and liability compared to regular employees.
Difference between independent contractors and employees
1. In the case of Independent contractors, employers can only influence the end result. Unless specifically stated in the contract, they have no control over how the contractor works or the tools are used.
Employees must work in accordance with the organization's policies and procedures. They are bound by the policies and rules that govern how the organisation operates.
2. Employee benefits such as Social Security, PF, or Medicare contributions, retirement benefits, and so on are not available to Independent contractors. They are required to file their taxes as a sole proprietorship.
In the case of employees, Medicare taxes and retirement contributions can be sponsored or matched by the organisation.
3. Independent contractors are frequently geographically distant from the company for which they work, and they can work with multiple companies at the same time.
Employees are only allowed to work with one organisation at a time.
4. Independent contractors can negotiate the amount of time and money needed to complete the task with the company, and they retain ownership of the work they do.
Employees do not own the rights to the work they produce. It becomes an integral part of the organization's operations.
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