What Is An Independent Contractor? What to Know (2026)

Not everyone who performs work for a business is an employee. Many companies work with independent contractors as well. What is an independent contractor, and how do you decide whether to work with one?

Defining the Role and Its Traits

What is an independent contractor? It is anyone who is in business for themselves. These workers are involved in almost every industry. They handle their own taxes, supply their own tools, and control how and when they work. Most contractors offer services to multiple clients.

How They Differ From Employees

What is an independent contractor compared to an employee? The IRS lays out several guidelines to help employers determine whether someone is a contractor or employee:

• If the company controls how the worker does the job (and not just the final result), that person is probably an employee.
• If the company provides training and tools needed to do the job, the worker is probably an employee.
• If the relationship is ongoing and benefits (insurance, pension, etc.) are provided, the worker is likely an employee.

The Department of Labor also publishes a detailed checklist to help employers and workers make sure they’re classified correctly.

Tax Duties and Deductions

Because independent contractors are self-employed, they are in charge of their own taxes. Companies don’t withhold payroll taxes for contractors, and they also don’t have to worry about offering benefits. However, if the contractor is paid at least $2,000, the company must issue a 1099 tax form.

Building a Work Agreement

You should always create an independent contractor agreement with any contractor you want to work with. Your agreement should at least include the following:

• The scope of the work being done
• The timeline
• Rates (hourly, by project, etc.)
• Payment terms
• Clarification over intellectual property ownership (if applicable)
• A clear statement that the worker is a contractor and not an employee

Having a clear agreement in place can dramatically reduce the risk of future disputes.

How Businesses Hire and Pay Them

Companies may find independent contractors through online marketplaces or personal referrals. In most cases, independent contractors send invoices for completed work, and companies pay upon receipt.

Even though hiring a contractor is often less involved than onboarding an employee, companies should still perform due diligence ahead of time.

Benefits and Risks for Companies

Working with an independent contractor comes with several benefits. Companies can dramatically reduce overhead costs, and they can gain access to specialized skills and expertise.

However, because contractors provide services to multiple companies, there’s no guarantee that a business will be able to continue working with a given person. Misclassifying an employee as an independent contractor can also lead to fines, penalties and even criminal charges.

The Importance of the Right Classification

When you understand which role best suits your company and make sure you classify all workers correctly, you’ll be well on your way to setting your company up for success. ConsumerShield’s collection of legal templates and guides can help you learn all you need to know.