What Is an Independent Contractor?

An independent contractor is a person or business engaged to produce a result while generally retaining control over how the work is performed. For federal tax purposes, an individual independent contractor is self-employed rather than an employee of the client.

What indicates independent-contractor status?

Federal tax classification looks at the entire relationship. The IRS organizes relevant evidence into three broad categories:

• Behavioral control: Who decides how, when, and where the work is done? Who provides instructions, training, tools, or evaluation systems?
• Financial control: Does the worker have a meaningful investment, unreimbursed expenses, opportunity for profit or loss, and freedom to offer services to the market?
• Type of relationship: What do the agreement, benefits, permanency, and importance of the services to the business show?

No single fact automatically controls. The legal right to control matters even when the business does not exercise that right every day.

What does not decide contractor status?

These facts are commonly overvalued:

• The agreement calls the worker an independent contractor.
• The worker asked to be paid without payroll withholding.
• The payer issued Form 1099-NEC.
• The worker formed an LLC or obtained an EIN.
• The worker is paid by project, commission, or piece rate.
• The worker works from home or sets some hours.
• The relationship involves only one client.

Each can be relevant, but classification requires the full factual and legal test.

How do independent contractors handle taxes?

An individual contractor generally reports business income and deductible expenses on Schedule C and calculates self-employment tax on Schedule SE. Income tax and self-employment tax may both apply.

Because clients usually do not withhold tax, contractors may need quarterly estimated payments. Ordinary and necessary business expenses may be deductible when the contractor has records and meets the specific rule. Personal expenses are not converted to business deductions by placing them on a business card.

What forms do contractors receive?

A business may be required to issue Form 1099-NEC for reportable nonemployee compensation. Payments through certain third-party networks or payment cards may instead be reported on Form 1099-K. A contractor must report taxable income whether or not a form arrives.

Before certain payments, a business may request Form W-9, which supplies the contractor's name, tax classification, address, and taxpayer identification number. Backup withholding can apply in some circumstances.

Independent-contractor example

A dental office hires a licensed plumber to replace a water line. The plumber advertises to the public, supplies tools, determines the method, carries business insurance, can earn a profit or suffer a loss, and invoices for the completed project. Those facts support an independent business relationship.

By contrast, calling a front-desk worker a "contractor" while the office sets the schedule, trains the worker, requires its procedures, provides the system, and maintains an ongoing relationship raises employee-classification concerns. The examples illustrate facts; they are not automatic rules.

Independent contractor vs. sole proprietor

"Independent contractor" describes the relationship between a service provider and client. "Sole proprietor" describes a one-owner unincorporated business. An individual contractor may operate as a sole proprietor, a single-member LLC, or through another entity.

What should the hiring business do?

Classify the worker before the first payment. Document the services, independence, business terms, insurance, invoicing, and tax information. If the person is an employee, establish payroll and comply with wage, tax, unemployment, workers' compensation, and reporting requirements.

Businesses and workers can submit Form SS-8 to request an IRS determination for federal employment-tax and withholding purposes.

California connection — the ABC test

California generally presumes a worker is an employee under the ABC test unless the hiring entity proves all three:

1. The worker is free from the hiring entity's control and direction, both under the contract and in fact.
2. The work is outside the usual course of the hiring entity's business.
3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature.

California law contains exemptions and special rules under which the Borello test or another standard may apply. Federal and California conclusions should be documented separately. See Employee vs. Independent Contractor for a fuller comparison.

Common mistakes

• Letting the worker choose the classification
• Using a 1099 as proof of status
• Ignoring California's presumption and exceptions
• Failing to report cash or income without a form
• Deducting personal costs as business expenses
• Treating gross receipts as spendable profit
• Failing to obtain Form W-9 before payment

Frequently asked questions

Related terms

• Employee vs. Independent Contractor
• Self-Employed Individual
• Sole Proprietorship
• Self-Employment Tax

Official sources

• IRS — Independent contractor defined
• IRS — Independent contractor or employee?
• IRS — Form SS-8
• IRS — About Form 1099-NEC
• California Labor & Workforce Development Agency — ABC test
• California DIR — Independent contractor versus employee

The definitions and examples on this page are for informational purposes only and do not constitute tax advice. Tax laws change frequently and individual circumstances vary. Consult a qualified tax professional before making decisions based on this content.