Independent contractor versus employee. Sometimes, it is not a straightforward matter to determine who is an independent contractor and who should be classified as an employee.
To make a determination, the IRS in the USA advises taxpayers to look at three aspects of the employment arrangement: financial control, behavioral control, and relationship between the parties. While some independent contractors may work for a number of different organizations throughout the year, there are also many who retain independent contractor status even though they work for the same organization for the entire year.
Generally speaking, independent contractors retain control over their schedule and number of hours worked, jobs accepted, and performance of their job. In addition, they may have a major investment in equipment, furnish all their own supplies, provide their own insurance, repairs, and all other expenses related to their business.
They may also perform a special service that is not in the normal course of business of the employer. This contrasts with the situation for regular employees, who usually work at the schedule required by the employer and whose performance is directly supervised by the employer. However many companies (particularly in the freight transport industry) specify the contractor's schedule, require purchase of vehicles from the company and prohibit work for other companies.
An independent contractor is a natural person, business, or corporation that provides goods or services to another entity under terms specified in a contract or within a verbal agreement. Unlike an employee, an independent contractor does not work regularly for an employer but works as and when required, during which time he or she may be subject to law of agency. Independent contractors are usually paid on a freelance basis.
Contractors often work through a limited company or franchise, which they themselves own, or may work through an umbrella company. In the United States, any company or organization engaged in a trade or business that pays more than $600 to an independent contractor in one year is required to report this to the Internal Revenue Service (IRS) as well as to the contractor, using Form 1099-MISC.
This form is merely a report of the money paid; independent contractors do not have income taxes withheld from their pay as regular employees do.