Working as an Independent Contractor FAQ
An independent contractor is a freelancer who provides services to another business entity based on the specific terms and conditions in a verbal/written contract as a non-employee. Here are several FAQ’s which comes in the mind while working as an independent contractor :
As an independent contractor, what would my employment status?
Independent contractors are self-employed, or the freelancers who work for their clients under specific terms and conditions for a pre-decided fee or amount. They can get the payment either lump sum amount, weekly, hourly or monthly, etc.) which may include the incentives or commissions. Independent contractors do not work on payroll. They work as a non-employee only.
The client pays the independent contractor through the accounts payable based on the invoice, which the individual contractor provides to the client for his services or amount of work done.
Does a freelancer have to pay taxes on his income?
Since an individual contractor works as a non-employee, the client does not withhold any taxes (federal, local or state) from the payments. Since the client has to fill form 1099 MISC as per the IRS guidelines and forwards one copy of that to the individual contractor, a contractor has to oblige all the taxes for the income earned during the calendar year.
These taxes are paid by the individual contractor four times in a year, instead of waiting till April 15th to pay all the due taxes. The individual contractors have the benefits of some specific tax deductions like Home-Office tax deduction. Also, the client does not withhold the paychecks for the taxes like Medicare and health insurance, etc.
How much should I charge clients and how can I make sure they pay me?
It is one of the crucial and challenging questions for an independent contractor. It is very challenging to figure out the exact amount that a contractor should charge in return of the services. The estimated figure must cover up all the expenses and compensate the time, which one has put up to complete the tasks. Besides, one should also earn some profit for the same. It is not only about deciding the fair value of your services up to a benchmark but even analyzing the market value also. Since there are many freelancers available for the same services, an independent contractor have to make sure about the business strategy of coping with the ones who are willing to provide the same services at lower rates.
Sometimes, a situation occurs when due to a specific reason, the contractor has to face difficulties from the client’s end at the time of getting paid for the work done so a contractor must have the sufficient knowledge about the legal actions which can be taken against the injustice.
Is written agreement is required when I do contract work for clients?
A smart, independent contractor always makes a smart move by providing a written agreement to the client describing all the terms and condition and relationship between them. This may prevent any dispute at the time of payment as things are almost pre-decided.
Also, it is a written proof that the independent contractor is working as a non-employee, and not as a regular employee. Thus, when it comes to the taxes obligations, following IRS guidelines becomes more comfortable due to the available records. Further, it is suggested to go through several Written service contracts, before preparing a one for you.
Who decides whether I’m an independent contractor or an employee? What happens when a government agency determines that I am an employee?
At the initial stages of your deal or the hiring process, it is decided that you are going to work as a regular employee or as an independent contractor by your own choice and the preferences. The Internal revenue system agency, state workers and other government agencies like unemployment compensation review it on any basis:-
- An independent contractor may have profits and loss based on the activities performed.
- A contractor can work for more than a firm at the same time.
- Invest’s according to own needs and requirements.
- An independent contractor owns expenses like travel, food, accommodation and so on the basis the type of job.
- The freelancers are work bound but not time-bound, they have the liberty to choose the timing or the working hours to complete the task or to deliver the services.
- An independent contractor may even outsource the work or hire further assistants as per the requirement.
Above mentioned vital points usually preserves the status of an independent contractor. But, in any case, if any of the government agency determines that one must be classified as a regular employee, several consequences arrive.
As an example, the hiring firm may deny continuing with the contract or the services as they might not want to pay the additional expenses which are to be bothered as an employee. If a contractor is reclassified as a regular employee, the tax deduction benefits will be nullified and some added responsibility concerning tax obligations will be put on the contractor as a burden. A written agreement is of great help, to provide the proof of your reserved status as an independent contractor to the IRS.
What is an independent contractor? Should I become an independent contractor?
Being an independent contractor is like owning a business. Independent contractors earn as much as they can, without having any limitations or without being answerable to the client that they are working for any other firm also.
Independent contractors are known to be consultants, self-employed freelancers, and even business owners. They expertise some skills and serve them to different clients based on their terms and conditions or as per the negotiations have done during the deal.
The advantages of being self-employed:
- No taxes (state or federal) are withheld from the salary or payments.
- One can earn more than a regular employee
- An independent contractor does not have a boss, but rather rule oneself.
Some of the major drawbacks of being an independent contractor:
- There is less security in the job
- Sometimes, you do not get the payments.
- Self-employment taxes are to be paid.
- Every liability for business, like debts, are personal.
- The employer does not provide the benefits similar to the regular employees.
- There are no unemployment insurance benefits.
- There are no workers’ compensation benefits provided by the employer.
- There are no Labor law protections.
How can IncParadise help you?
An independent contractor is a freelancer or a business owner, who has the authority to take all the decisions and liberty to earn more. So, before choosing your employment status, go through the critical questions which we have shared with you.
And, if you want to start, your own business, the IncParadise can assist you for the registration and incorporation of your company. At IncParadise, you may also get the assistance for the services like mail-forwarding, or so. You can check out the details on the website and choose the package that is best suitable for you.