Independent Contractor
A self-employed individual who provides services to clients.
An independent contractor is a worker who provides services under a contract but is not an employee. The IRS uses behavioral control, financial control, and relationship type to determine classification. Misclassifying employees as contractors exposes businesses to back taxes, penalties, and interest. Contractors receive 1099s instead of W-2s.
Example
A restaurant hires a web designer to build their website for a flat fee of $5,000—the designer sets their own hours, uses their own equipment, and receives a 1099-NEC.
Why It Matters for Your Business
Misclassifying workers is one of the most common and costly IRS compliance failures, potentially resulting in back taxes, penalties, and lawsuits.
Practical Tips
- •Use the IRS 20-factor test to evaluate whether a worker qualifies as a contractor.
- •Have all contractors sign a written agreement defining the scope and nature of the relationship.
Related Terms
More Taxes Terms
Adjusted Gross Income
Gross income minus specific deductions like retirement contributions.
Tax Audit
An examination of tax returns by the IRS to verify accuracy.
Capital Gains
Profit from selling an asset for more than its purchase price.
Capital Loss
Loss from selling an asset for less than its purchase price.
Tax Deduction
An expense that reduces taxable income.
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