At some point, most businesses need to hire a specialized or short-term worker to tackle a specific project. When this happens, you’ll likely need to hire a freelancer and draft an independent contractor agreement to protect your business as well as the contractor.
Knowing what obligations to include in your independent contractor agreement will ensure that you aren’t liable for any tax fines, legal disputes, or liabilities for the services the contractor provides.
Here is a guide on how to draft an independent contractor agreement, as well as an overview of the content you should include to protect yourself and the contractor.
Independent contractors are self-employed individuals or businesses (LLC) that provide a service or complete a project for a customer in exchange for payment. In the United States, the agreement between the two parties can be made verbally or in writing.
Normally, independent contractors have complete control over when and how a project or service is completed, with the client having a final say over the finished product or job. A full-time employee, on the other hand, is more integrated into the company or business, receiving more hands-on guidance from their employer on everyday tasks.
Independent contractors are known also as freelancers or 1099 contractors.
Independent contractor agreements outline important details between the contractor and client, including:
Description of the services being provided
Length of the project or service
Payment and other billing details
Drafting a strong contract that outlines exactly what the expectations are between both parties is crucial in maintaining integrity and ensuring projects are completed correctly. These agreements can help resolve any disputes that come up during the project or relationship.
Independent contractor agreements also help minimize any future liabilities for both parties. Such agreements set the tone for how the working relationship will unfold between the client and contractor.
When considering whether or not to hire an independent contractor, you need to make sure that you are properly classifying workers.
If you treat independent contractors as full-time employees, you could face legal backlashes and tax fines. Independent contractors function as individuals and are responsible for paying their own taxes out of the money they make from each service or project, so not paying taxes on behalf of workers could be considered tax evasion.
Here are the main differences between the two:
Employer is responsible for creating job
Employer sets the wages or salary
Employer controls when and how employee finishes work
Employer is responsible for deducting payroll taxes
Employees are normally entitled to additional benefits like insurance and vacation
Employer helps or monitors training process
Hired for specific projects based on existing experience
Not entitled to employee benefits
Has personal investments in their own business
Uses invoices to bill clients
Works on projects for a set amount of time
Uses their own tools or equipment
Pay for their family’s insurance on their own
Responsible for paying their own tax obligations
Although legal ramifications for misclassification vary from country to country, in the United States, the IRS (internal revenue service) handles all compliance issues related to the misclassification of employees.
Misclassifying employees in the United States, for example, can have ramifications as mild as fines to as severe as jail time, depending on the severity and intention behind the error. Be sure to review your contracts carefully.
Some of the most common penalties in the US are:
$50 fine for not filling out a W-2 form
Penalties for not withholding income taxes correctly and filling out tax documents incorrectly
Failure-to-pay penalties that can add up to between .05% to up to 25%, depending on how long the employer has been misclassifying employees
So, you should always make sure that wherever you’re planning to hire independent contractors, you research or work with a legal team, PEO service, or EOR service like Via. Global employment service providers have in-depth knowledge about exactly what the local laws are regarding hiring contractors. Using an EOR service like Via will help you avoid working with a law firm and paying the hefty fees associated with their services.
You should always state the location of where both your company is and where the contractor is expected to work.
Include a description of exactly what services or project the contractor is completing for your business. This will make sure that all of the expectations between both parties are clear before anyone begins working.
Make sure the exact compensation that the contractor will be provided is clear and agreed upon before the start of their service. This should include billing rates, retainers, deposits, frequency of payments, and what happens if a payment is made late. This will act as your bill of sale when you’re calculating taxes at the end of the year.
For easy reference, include the names, address, and any other relevant information for both the contractor and the client. This allows both parties to contact with each other if one person forgets information about the other (especially for extended projects where frequent contact isn’t always necessary).
Make sure that you include any terms and conditions explicitly in the contract. If either party needs to terminate the agreement, make sure to include exactly why, and how much notice needs to be given.
For short-term projects, 1-week notice may be sufficient, but to ensure protection for both parties, it’s better to shoot for 15-30 days notice for planning.
Include details about reimbursement if the contractor needs to use a hotel to complete the project or tools outside of what they normally have.
You may even need to include an “intellectual property” clause, depending on what service the contractor is providing. If the contractor is working on logos, artwork, or graphic design, you should make sure you agree upon who owns the rights to the intellectual property.
When you use an independent contractor, include exactly when you plan to sign the contract and when work will begin. If witnesses are needed for the contract, you should also add those people to the contract at the bottom to make sure that all of your bases are covered. You should make sure that the signatures of all parties are included before beginning services.
Many people create independent contractor agreements with templates like the one below.
(Note: This blog post is not a replacement for legal advice. You should still consult local attorneys and accounting experts while drafting independent contractor agreements for your business)
This agreement made between__________________(Client), and_______________,(Contractor). Business will be conducted at the principal location of__________________________.
Term of Agreement
This Agreement will become effective on the ______ day of _______________, 20__, and will continue in effect until: ________, 20__.
Services to be Rendered by Contractor
Contractor agrees to perform the following services:
In consideration for the services to be performed by Contractor, the Client agrees to pay Contractor the following rate of ________________________ once service(s) or project is complete
Contractor will be responsible for all expenses incurred while performing services under this Agreement. This includes automobile, truck, and other travel expenses; vehicle maintenance and repair costs; vehicle and other license fees and permits; insurance premiums; road, fuel, and other taxes; meals; and all salary, expenses, and all other compensation paid to employees or contract personnel the Contractor hires to complete the work under this Agreement.
Client shall reimburse Contractor for the following expenses that are attributable directly to work performed under this Agreement: ___________________________________________.
Contractor shall submit an itemized statement of Contractor's expenses. Client shall pay Contractor within 30 days after receipt of each statement.
Independent contractor status:
Contractor will be in charge of all of their own work and any personal staff they hire to complete the job.
State and Federal Taxes
Client will not:
• withhold FICA (Social Security and Medicare taxes) from Contractor's payments or make FICA payments on Contractor's behalf
• make state or federal unemployment compensation contributions on Contractor's behalf, or
• withhold state or federal income tax from Contractor's payments.
Contractor shall pay all taxes incurred while performing services under this Agreement—including all applicable income taxes and, if Contractor is not a corporation, self-employment (Social Security) taxes. Upon demand, the Contractor shall provide the Client with proof that such payments have been made.
Contractor understands that neither Contractor nor Contractor's employees are eligible to participate in any employee fringe benefits including vacation, paid time off, sick days, health insurance, and retirement benefits.
Terms of Agreement
This agreement will become effective when signed by both parties and will terminate only under these conditions:
• the date Contractor completes the services required by this Agreement ____________ (date),
• the date a party terminates the Agreement as provided below.
Terminating the Agreement
With reasonable cause, either Client or Contractor may terminate this Agreement, effective immediately upon giving written notice, .
Reasonable cause includes:
• a material violation of this Agreement, or
• any act exposing the other party to liability to others for personal injury or property damage.
Either party may terminate this Agreement at any time by giving ____ days' written notice to the other party of the intent to terminate.
This is the entire Agreement between Contractor and Client.
Modifying the Agreement
This Agreement may be modified only in writing signed by both parties and in agreement of both parties.
If a dispute arises under this Agreement, the parties agree to first try to resolve the dispute with the help of a mutually agreed-upon mediator in the state (or country) the dispute arises. Any costs and fees other than attorney fees associated with the mediation shall be shared equally by the parties. If it proves impossible to arrive at a mutually satisfactory solution through mediation, the parties agree to submit the dispute to a mutually agreed-upon arbitrator. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction to do so. Costs of arbitration, including attorney fees, will be allocated by the arbitrator.
Contractor acknowledges that it will be necessary for Client to disclose certain confidential and proprietary information to Contractor in order for Contractor to perform duties under this Agreement. Contractor acknowledges that disclosure to a third party or misuse of this proprietary or confidential information would irreparably harm Client. Accordingly, Contractor will not disclose or use, either during or after the term of this Agreement, any proprietary or confidential information of Client without Client's prior written permission except to the extent necessary to perform services on Client's behalf.
Proprietary or confidential information includes:
• the written, printed, graphic, or electronically recorded materials furnished by Client for Contractor to use
• any written or tangible information stamped “confidential,” “proprietary,” or with a similar legend, or any information that Client makes reasonable efforts to maintain the secrecy of
• business or marketing plans or strategies, customer lists, operating procedures, trade secrets, design formulas, know-how and processes, computer programs and inventories, discoveries, and improvements of any kind, sales projections, and pricing information
• information belonging to customers and suppliers of Client about whom Contractor gained knowledge as a result of Contractor's services to Client, and
• other: _____________________.
Upon termination of Contractor's services to Client, or at Client's request, Contractor shall deliver to Client all materials in Contractor's possession relating to Client's business.
This Agreement shall be governed by and construed in accordance with the laws of the (state or country) of ________________________________.
Client/Owner, _____________________ Date_______________________
Contractor ______________________ Date_______________________