TL;DR

An independent contractor does work for clients without being their employee. The distinction is legally and tax-significant — contractors receive 1099 forms (not W-2s), pay their own taxes, and manage their own business operations.

Key Points

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The IRS uses a behavioral, financial, and relationship test to determine whether a worker is an employee or independent contractor

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Misclassifying an employee as a contractor is a significant legal risk for both businesses and the workers themselves

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Independent contractors receive Form 1099-NEC (not a W-2) for payments of $600 or more from a client

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Contractors can deduct legitimate business expenses against their income to reduce their tax liability

Employee vs. Independent Contractor

The IRS distinguishes employees from independent contractors using three main factors: behavioral control (does the company control how work is done?), financial control (does the company control business aspects like expense reimbursements?), and type of relationship (is there a permanent, ongoing relationship with benefits?)¹. Independent contractors have control over how and when they perform work, typically use their own tools and equipment, work for multiple clients simultaneously, and invoice for their services rather than receiving a paycheck. If a company controls your schedule, provides all equipment, and you work exclusively for them indefinitely, you may be an employee regardless of how the contract is written.

Tax Obligations for Contractors

As an independent contractor, no taxes are withheld from your payments. You're responsible for paying both the employee and employer portions of Social Security and Medicare as Self-Employment Tax (currently 15.3%). You must also make quarterly estimated tax payments to avoid underpayment penalties. Clients who pay you $600 or more in a calendar year are required to issue you a 1099 Form and file one with the IRS. You should issue them a W-9 Form with your taxpayer identification information when you begin working together.

Protecting Your Contractor Status

To maintain a legitimate contractor relationship and reduce misclassification risk: use a signed Contract or Service Agreement that clearly defines the nature of the engagement, work with multiple clients rather than one full-time client, invoice for completed work rather than receiving a regular paycheck, maintain your own business expenses and equipment, and operate under your own business name. A sole proprietorship or LLC further formalizes your status as an independent business. Proper documentation protects both you and your clients if the IRS ever questions the classification.

References

IRS — Self-Employment Tax (Social Security and Medicare Taxes) ↗

irs.gov

SBA — Register Your Business ↗

sba.gov

Last updated: June 9, 2026

Related Terms

Freelancer

A self-employed individual who provides services to clients on a project or contract basis rather than as a permanent employee of any single organization.

Sole Proprietor

An individual who owns and operates an unincorporated business personally, bearing full personal liability for all business debts and obligations.

Self-Employment Tax

A US federal tax consisting of Social Security and Medicare contributions that self-employed individuals must pay, covering both the employee and employer portions typically split in traditional employment.

1099 Form

A series of IRS tax forms used to report income received from sources other than an employer, including freelance payments, contractor fees, and other non-wage income.

W-9 Form

An IRS form used to provide a taxpayer identification number (SSN or EIN) to a client or business that needs to report payments to the IRS via a 1099 form.

Contract

A legally binding written agreement between two or more parties that defines the terms of an exchange of services or goods, including scope, compensation, timeline, and remedies for breach.

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