What Is an Independent Contractor Agreement: A Complete Guide
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Everyone knows the way we work has changed. Remote work is the new normal and the “gig economy” is in full swing. One shift that continues to accelerate is independent contracting, both within the United States and abroad.
Independent contractors (ICs) are workers who provide services to a business as non-employees. That’s right: independent contractors are not legal employees of the companies that pay them. Companies must provide full-time employees salaries and statutory benefits (like health insurance and worker’s compensation). Companies also have a high degree of control over when and how employees work. But companies are not required to provide benefits to ICs and have far less control over their working relationship.
Thanks to LinkedIn, Upwork, and other online job boards, finding contractors is more accessible than ever. But hiring an independent contractor is more complex than you might think. Even if you hire an independent contractor instead of a full-time employee, you must file the proper paperwork with the IRS and complete an independent contractor agreement.
An independent contractor agreement clearly outlines the terms of your working relationship and demonstrates the worker is not an employee of your company. Without an airtight IC agreement, you may be guilty of employment misclassification and face steep misclassification penalties. These legal hurdles get even more complicated should you attempt to hire an independent contractor in another country.
An independent contractor agreement is a document outlining the business relationship between a hiring company and a contractor. These legally binding written documents establish clear expectations, protect both parties, and avoid employment misclassification.
Unlike an employment contract, an independent contractor agreement includes specifications about the worker’s services or projects, including the deadline and desired outcome. For example, suppose you hire a freelance graphic designer to create a website for your company. The contractor agreement needs to specify the full set of deliverables and their due dates, payment rates, and guidelines for the website’s look and feel.
Independent contractor agreements protect the contractor and company
Contractor agreements are complex, but they save both parties from legal, material, and job-related headaches. They’re even more complicated (and important) when hiring foreign independent contractors because they must account for the intricacies of local labor laws and regulations. Invest time and draft a tailor-made contractor agreement for each project you undertake or hire to avoid legal and financial punishment.
In the United States, the IRS is on the lookout for companies misclassifying employees as contractors. They are aware that companies may hire “independent contractors” (who really function as full-time employees) because companies don’t have to pay payroll taxes or offer statutory benefits to contractors. But remember, independent contractors enjoy much more flexibility and control than full-time employees.
An effective independent contractor agreement is an important layer of protection. But the reality of the relationship is more important. If your agreement describes a contractor relationship but you treat the contractor as an employee, you are still at risk for misclassification.
An effective independent contractor agreement protects the client company by showing the worker qualifies as an independent contractor. They will clearly state the IC will not receive employee benefits like:
- Health insurance
- Compensation insurance
- Unemployment compensation
- Insurance coverage
- Paid time off
Also, independent contractor agreements clarify expectations about the working arrangement for both parties. Specifications could include:
- The contractor is accountable for completing projects on time and according to the company’s standards (but on their own time)
- The company must pay the contractor an agreed-upon wage for projects of a set scope
- The contractor is not required to participate in training, meetings, and reviews that full-time employees must attend
Also, if your company decides to hire an independent contractor, having a written contract is mandatory for invoice bookkeeping and tax purposes.
Do I need an independent contractor agreement?
Every time a non-full-time employee completes a project or service for a company, you need to sign an independent contractor agreement. If you aren’t sure where you or one of your workers falls, check out our guide on independent contractors vs. employees for clarification.
The term independent contractor encompasses a range of working relationships: an independent contractor could work 40 hours a week with a single company. Another independent contractor could complete a few hours of work a week for multiple companies. Either way, working engagements must include independent contractor agreements to establish legal independent contractor status.
According to the IRS, all independent contractors are self-employed but not all self-employed people are ICs. Check out our guide on independent contractor vs. self-employed to learn the difference.
Why free independent contractor agreement templates are a bad idea
If you just learned that you have to create an agreement for every independent contractor you hire, your first instinct might be to turn to the internet to find a free contractor agreement template. We understand your desire to save time but proceed with extreme caution: these free templates are often overly basic and only apply to certain contractors.
You should absolutely avoid free templates if you plan to hire international contractors. Local labor and tax laws differ between countries, so a template that works for one country could leave you legally vulnerable in another. Check out our guides on the UK’s IR35 (for non-payroll workers) and Serbia’s independence test for lump-sum entrepreneurs. The differences are subtle but important, and even slight misunderstanding opens you up to employment misclassification risk.
If you choose to hire independent contractors in a foreign country, consider consulting a law firm in that country: attorneys’ fees are a small price to pay compared to the IRS’s fines. Alternatively, use a service that provides contractor agreements compliant with local laws. Either way, avoid generic templates.
What should an independent contractor agreement include?
The primary goal of contractor agreements is to clarify this is an independent contractor relationship, not a joint venture or full-time employment. In addition, agreements include sections to set expectations about the scope of work, client needs, compensation, and deadlines.
The entire agreement should cover the following:
General information about the contractor and client
The first section of the contractor agreement defines the client company and the person or entity providing the service, or the contractor. Include identifying information and contact methods for both parties, like legal names and addresses.
Services and scope of work
The next clause in the document describes the terms of services the IC will provide. Many contractor relationships include overarching services terms in the primary agreement and then create separate statements of work for each additional project. If you choose to do this, state that the stipulations made in the original agreement apply to all future statements of work.
Most scope-of-work statements use the wording, "The contractor will provide the following services:" followed by the list of agreed-upon services. The client company must create a thorough brief for best results. A great brief provides ample details about the work product, including its purpose, relevant user/buyer information, and more. The brief prevents misunderstandings and leads to faster, higher-quality work.
The contract should also clarify the contractor is free to determine the pace at which they complete the project, so long as they meet any specified deadlines. The client company has little control over the contractor’s methods of procuring deliverables; they are only entitled to receive deliverables by the specified date.
Permission to hire subcontractors
This part of the agreement should specify whether the contractor has the right to hire assistants as subcontractors to perform services for the client company.
The client should give prior written consent for such hiring (or exclude it from the agreement). This clause should also note that the contractor is responsible for paying the subcontractors and their taxes, freeing the client from any financial liability. Emphasize that even if the client agrees to let the contractor use assistants, those assistants are the contractor's responsibility and not the client company’s.
Clearly state that compliance with the contractor agreement extends to subcontractors as well.
Equipment and facilities
Compensation for the services provided
The agreement specifies how much the company will pay the contractor, whether the payments happen in installments, and details around the payment frequency. For example, the contracts might note whether payment depends on deliverables and the expected delivery date.
Agreements may not mention the specific, such as the payment method and pay-by date. However, it’s best practice to state that the business will make a reasonable effort to pay the contractor promptly.
Check out our ultimate guide on how to pay independent contractors.
Expenses, travel, and reimbursement policies
Generally, independent contractors provide services with their own equipment from their own place of work. However, in some cases, specialized equipment and travel are necessary to provide the services outlined in the contract.
Include a section specifying what types of equipment the company will provide and whether the contractor will need to travel. Describe your reimbursement policy should either come into play.
Effective date of the agreement
The effective date is the date of the beginning of the agreement and the work in question. It clarifies when the business relationship begins and when the contract provisions become active.
Benefits and liability exclusion
Establish independent contractor status by clarifying the contractor has no claim to usual employee perks. This section of the agreement states the client company does not cover the contractor’s:
- Social security
- Medicare or health insurance
- Worker's compensation
- Sick or vacation pay
These exclusions enable the client company to forego payroll taxes and avoid withholding FICA from the payments made to the contractor. The independent contractor is the taxpayer for independent contractor taxes like federal income taxes, state income taxes, and self-employment taxes.
Termination of the agreement
Typically, the termination of the agreement will probably be tied to the completion of deliverables. Define those deliverables in as much detail as possible, including an expected due date.
Sometimes, companies hire independent contractors on a long-term or even indefinite basis. State the conditions for termination of this agreement along with the number of days notice required for termination.
The indemnification clause covers the client's liability for any fees, costs, and judgments against the contractor. It states the contractor agrees to indemnify, or compensate, the client for all losses and claims that result from the contractor's misactions. The clause mainly serves to protect the client from legal consequences for the acts of their contractor.
The severability clause says that if any provisions of this agreement become unenforceable or invalid, the rest of the contract remains intact. In other words, if one section of the contract were to change or become invalid, the entire contract other that section will remain valid and both parties will retain the protections it provides
The governing laws (or applicable laws) section states which party’s laws of the state or country will apply to the agreement if legal trouble arises during the term of this agreement. Clarifying applicable governing laws is especially important if the parties involved are not in the same country and cannot resolve an issue through arbitration.
The state and country of the client company’s headquarters are the most common choice for applicable laws. However, if a bulk of the services occur at the contractor’s residence, the court may disregard the agreement’s governing law statement. There’s no simple answer here, which is why we encourage you to consult with an attorney or use a service pre-built to handle international independent contractor relationships.
The waiver clause proves to release any rights in the business relationship between the hiring company and the contractor. Waiver clauses are standard practice but must appear in writing.
This section indicates that the contractor must have liability insurance and that the client is not responsible for covering the contractor with their insurance policy.
Warranties and professional capacity
The warranties and capacity section is one of a few essential provisions in independent contractor agreements. Here, the contractor agrees they have the capacity, methods, and equipment that warranties they will fulfill the task.
Independent contractors have the right to work with multiple companies and provide deliverables however they prefer. However, the client company needs to know they have the capacity and capability to complete the job they hire the IC to do.
Intellectual property and ownership
Working with contractors or freelancers requires clear boundaries over who owns the project's end result. Outline ownership over any intellectual property developed by the contractor to avoid any legal battles. This is especially important for international hires, as intellectual property laws differ per country.
Independent contractors often work with sensitive and sometimes even confidential information. Sharing this information may cause discomfort since have yet to establish trust, and the IC is not a full-time employee.
Include a confidentiality clause (a non-disclosure agreement) in your contractor agreement to mitigate risks. Clarify what constitutes confidential information, including:
- Patent rights
- Trade secrets
- Marketing plans
- Business strategy
- Customer databases
This section acknowledges the contractor understands what qualifies as confidential information and agrees not to divulge or disclose this information to any third parties. Breaching a confidentiality agreement can be a cause for terminating the contract.
A non-compete agreement is a binding document that prevents an independent contractor from working with their client's competitor during the contract duration and, at times, a set period of time afterward.
Not all countries and US states allow non-compete protection for independent contractors. Joe Biden’s 2021 executive order asks the federal trade commission to limit the use of non-compete clauses to promote productive competition in the US economy, complicating the issue further.
If the country or state where you're operating is not allowing a non-compete agreement, opt for a confidentiality or non-solicitation clause instead.
How to negotiate an independent contractor agreement?
Client companies often create independent contractor agreements, but they do not have the only say. You will most probably have the opportunity to negotiate your independent contractor agreement, especially if you request to do so.
Independent contractors most often negotiate details related to:
- Scope of work
- Terms of termination
- Payment terms
- Confidentiality and non-compete clauses
Don’t overthink negotiations: client companies worth working with will be flexible and accommodate any reasonable needs you express. Before signing the contract, list and request any changes you’d like to see.
How often must an independent contractor agreement be renewed?
Most independent contract agreements state the duration (and termination date) of the working relationship. However, you should take the time to renew your agreement if there are changes regarding:
Basic information (business name, address, type of entity)
Scope of work, deliverable requirements, or due dates
Payment terms or compensation
How to terminate an independent contractor agreement?
Although clients cannot technically fire independent contractors, they can terminate independent contractor agreements in some instances. Most often, when the contractor’s work wasn’t delivered as expected or either party disregards the terms of this agreement.
Make sure you respect the legal aspects of the independent contractor agreement and pay the contractor for the completed work, even if you terminate the contract.
Read more about how to terminate an independent contractor agreement.
What else do I need to hire an independent contractor as a US company?
An independent contractor agreement is an essential document, but it’s only one document you need to hire an independent contractor legally. You’ll also need:
A record-keeping system
The client company must save all documents and records in case you need to prove that the worker is a contractor and not an employee. Apart from the independent contractor agreement, you need to keep all invoices and payment information.
If you are unsure whether the contractor you are hiring could qualify as an employee in the eyes of the IRS, you can submit Form SS-8 at any moment to determine the worker's status.
Companies and contractors must keep completed copies of a 1099-NEC tax form. This document replaced the 1099-MISC in 2020 and reports any payments made to non-employee contractors above $600 in any particular tax year. The client company must file a copy of the 1099-NEC with the IRS and provide another copy to the contractor. The contractor includes the 1099-NEC in their year-end tax filing.
At the beginning of the contractor relationship, you’ll also have to fill out a W- form to collect the worker’s tax identification number (TIN) or social security number (SSN). If the contractor resides in the US, you must fill out and file a W-9. If they live abroad, you need a W-8BEN. Either way, these W- forms are not filed with the IRS. But they must be completed at the beginning of the relationship for the company to provide a 1099 form.
It’s incredibly tricky to hire independent contractors outside of the US as a US company. You have to make sure your agreement complies with local laws, prepare the proper tax documents, and set up payment systems with foreign banks.
International agreements are also more complicated because it’s unclear which country’s laws take precedence should issues arise.
The guidelines are a great start to creating an independent contractor agreement or, at least, understanding its elements a little better. Creating an iron-clad contract can take time, but it is most certainly worth the investment.
If you want to hire independent contractors for your business, Deel can help you streamline the hiring and onboarding process. We offer localized contracts and contractor agreements, simplified tax form collection, and the best payment experience for both you and the contractors.
Request a demo to see how it works.