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Are Independent Contractors Self-Employed?

Are independent contractors self-employed? And are all self-employed individuals considered independent contractors? Yes, here's what to know.

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What Is the Legal Definition of Self-Employment?

Self-employment, or contractor definition, is when a worker conducts their own business, whether as a business owner or a partner, instead of working for an employer.

The Internal Revenue Service (IRS) dubs them as a person whose job is to “carry on a trade or business as a sole proprietor or an independent contractor.”

The self-employed worker must submit an annual tax return and pay a tax every quarter in advance, as per Form 1040 or Form 1040-SR.

Are Independent Contractors Self-Employed?

According to the Internal Revenue Service (IRS), an independent contractor is a self-employed worker. As long as the payer can rightfully control or direct the results of the worker but not the process—the work process and how it will be done—then the worker is an independent contractor.

Your earnings are subject to self-employment tax if you’re an independent contractor. You also must pay your own Social Security, Medicare tax, and income tax.

Contrarily, an employer is obligated to do that for a worker if they’re under their employment.

What Are the Legal Responsibilities of an Independent Contractor?

As per tort law, an employer usually has no vicarious liability for the tortious acts of an independent contractor. However, some duties of certain conduct are non-delegable, where employers remain vicariously liable.

These include the following:

  • Inherently dangerous activities.
  • Duties related to a plaintiff or public relationship.
  • Duties that are relevant to keeping premises open safely.
  • Duties to comply with state safety statutes in a minority of jurisdictions.

What Type of Employee is an Independent Contractor?

An independent contractor is a worker who hasn’t gone through a company’s onboarding and hiring process.

While the company pays the contractor, a contractor still isn’t an employee and is dubbed a self-employed person, or “business of self.”

An employee can’t work for multiple clients simultaneously, but an independent contractor can.

If you want to check out some independent contractor stats, you can look at the employee and independent contractor comparison chart by the U.S. Department of Labor.

What’s the Difference Between Self-Employment and Independent Contracting?

A self-employed individual is a person who has a small business or is a business owner and is fully responsible for it. They find clients, set their rates, and handle their taxes, including income tax, self-employment tax, etc.

An independent contractor works for a company or individual to offer a specific service.

However, they’re still not considered a worker at that company, so they still have to manage their income tax the same way a self-employed individual would.

Can a Contractor Be Self-Employed?

Yes. An independent contractor, or 1099 contractor definition, is a self-employed person in most cases, and that’s why they have to pay independent contractor taxes.

Is It Better to be an Employee or an Independent Contractor?

The answer to this question depends on multiple variables, but the most important are your skills and work-life balance preferences.

Being an independent contractor suits those who love being their boss and having the highest degree of control over the work they accept and do.

It also suits those who would like to start a small business with a sole proprietorship where they can make more money while benefiting from expense deductions—a massive tax benefit.

You have to weigh the downsides, which include withholding your own FICA taxes, which consist of a combination of Social Security and Medicare tax and can reach up to 15.3% of your earnings.

Further, you’ll have to handle health insurance and benefits on your own, including health and liability insurance and errors and omissions insurance.

Since you have sole proprietorship of your business, you’ll have to acquire the equipment and tools necessary to conduct the work.

Finally, you’ll need a federal and state tax ID number. You have to get those to apply for licenses and permits, have a bank account, hire employees, and pay federal taxes.

How Do I Know If I Am Self-Employed?

In some situations, it can be more difficult to define whether you’re an employee or a self-employed person.

If you do work for someone and aren’t responsible for the risks of running a business, you’re an employee.

If you’re the sole proprietor of your work’s success and failure in the trade, profession, or vocation you conduct, you’re a self-employed individual.

Other Things That Independent Contractors Might Need

If you’re going to work as an independent contractor, there are a couple of aspects to keep in mind.

vector graphic showing an illustration of people working for gig worker vs independent contractor

1. Do Independent Contractors Pay Taxes?

Yes. As an independent contractor, you must pay independent contractor taxes, and you must provide your legal name and taxpayer identification number (TIN) on Form W-9.

The IRS recommends that employers keep the independent contract details for a minimum of four years.

Employers also have to report the yearly payments of an independent contract using Form 1099-NEC. However, there are some cases exempt from this if they meet the exemption criteria.

2. Do Independent Contractors Need a Business Structure?

By default, a worker’s business structure is a sole proprietorship. However, a self-employed worker can set up other business structures, including corporations, limited liability companies (LLCs), partnerships, etc.

While you’re not required to stray from being the sole proprietor, it can help you expand your work as well as keep track of income and expenses.

If you decide to stick to a sole proprietorship, all you have to do is monitor the business expenses and income and pay your income tax and self-employment tax.

It’s worth noting that even with a sole proprietorship, you must keep personal and business expenses and income separate.

3. Do Independent Contractors Need Health Insurance?

Yes. Independent contractors need health insurance for multiple reasons. You may need liability insurance, errors and omissions insurance, or both, depending on the work you do.

General liability insurance helps you handle legal expenses in case you get sued by someone who’s not an employee.

Liability insurance typically covers property damage, slander and libel, product liability, copyright infringement, slip and fall accidents, and bodily injury inflicted on someone who isn’t your employee.

Independent Contractors Who Commonly Need Liability Insurance

Here’s a list of the most common independent contractor jobs that need liability insurance:

  • Animal trainers.
  • Dog groomers, walkers, trainers, and sitters.
  • Artists, including writers, product designers, and graphic designers.
  • Carpet cleaners, business cleaners, and home cleaners.
  • Repairmen and handymen.
  • Painters, carpenters, electricians, and plumbers.
  • Construction workers of all types.

How to Become an Independent Contractor

To become an independent contractor, there are a couple of important steps that you should follow to be able to navigate the process.

1. Devise a Business Structure

You should determine the business structure that your contracting firm will follow, whether it’s a sole proprietorship, partnership, or LLC.

Consider the type of industry that you’ll be operating in, the cost associated with the set-up, and how the future operations will go, including the rules and regulations.

2. Choose a Business Name, Register It, and Obtain Licenses and Permits

Operating under a company name can be more appealing to customers and clients than using your name.

You’ll need to fill out a declaration of trade form and register your business name with an agent if you want to run a sole proprietorship business.

After that, you’ll need to obtain your licenses and permits to operate as a contractor. Otherwise, you may be subject to fines or authority orders to stop your operations.

This is especially true with how recent legislation impacted the gig economy.

3. Obtain a Business Number and Identify Tax Requirements

When your business is up and running, you’ll have to take care of any issues related to tax payments. This includes obtaining a business number and understanding the types of taxes you have to pay.

Additionally, if you earn dividends or a salary from your business, you’ll need to file a personal tax return.

4. Obtain Insurance for the Business

When running an independent contracting business, you must keep yourself safe with insurance.

There are multiple insurance policies, like liability insurance, which cover you and mitigate losses in case of failure or hiccups.

You should consult an insurance agent to understand the best policy for your business case.

5. Maintain and Grow Your Business

With contracting jobs, you learn the definition of a gig as well as understand more about the types of gig workers.

Since the work isn’t consistent and depends on market demand as well as the skills of the individual, finding gigs isn’t always easy.

If you’re struggling with growing your business, you can resort to one of the gig companies that help you land more contractual jobs.

Wrapping Up

In conclusion, as an independent contractor, you’re generally considered self-employed, and that’s why you have to take the proper actions to avoid legal liabilities.

Independent contracting can be fruitful, as long as you take the correct steps to maximize profits, mitigate losses, and keep your business growing.

Leave a comment if you think you need further clarification on a certain point or if you have any questions!

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