What is an independent contractor?

As you look at ways to grow your team — and your business — you may have come across the term “independent contractor.”

But what does it mean to be an independent contractor? And, more importantly, how can they be useful to your business?

In this article, we’ll explain what exactly a contractor does, when your company should consider using one, and what you should know about working with one.

We’ll also break down the difference between contractors and employees, outline the pros and cons, provide some independent contractor examples, and explain the risks associated with confusing the two.

So, let’s dive right in.

What is an independent contractor?

An independent contractor is someone you pay to perform a specified task or service. They could be hired for a one-off project or to perform work on an ongoing basis, but they are not employees.

For example, you might hire a contractor to design your company’s website or translate some blog content each month.

A signed agreement beforehand should always outline the exact scope of work and compensation. This agreement usually focuses on the expected outcome of the collaboration rather than on how the work itself is carried out.

Once the job is complete, the contractor will issue you an invoice to wrap up their employment.

What is the difference between an employee and an independent contractor?

As mentioned, independent contractors are not the same as employees, even though they both perform work for your business in exchange for compensation.

Employees generally work on a contract of service, whereas contractors work on a contract for services.

In most cases, independent contractors are self-employed. They set their hours, provide their tools and equipment, and work with whichever clients they want. You are not the contractor’s employer: you are their client. As a result, you are not entitled to control their work conditions or force them to work exclusively for you.

On the flip side, it also means that — in most cases — they are not legally entitled to the same benefits and protections as employees. If you work with a contractor, you are usually not required to provide statutory benefits. Contractors are also responsible for handling their taxes. 

It’s vital to ensure that you are not treating your contractors the same way as your employees (or vice versa), as this can lead to misclassification. This huge legal risk can lead to fines and penalties for your business. We will look more closely at misclassification later in this article.

Here’s how to tell independent contractors apart from employees:

Independent contractors:

• Calculate their own taxes and tax deductions

• Are not eligible for statutory benefits (unless explicitly stated in the labor legislation of the contractor’s country)

• Make and manage their social insurance contributions

• Are entitled to choose their working hours and methods, work with other clients, and provide their own tools and equipment

• Issue invoices for payment

Employees:

• Have their taxes withheld and paid by you, the employer.

• Are entitled to receive statutory benefits (in line with their country's labor legislation).

• Have their social insurance contributions withheld and managed by you, the employer. In most cases, you must also make additional contributions on your employee's behalf.

• Work under your authority. You set the working hours and methods, dictate how the work should be carried out, and typically provide the necessary tools and equipment.

• Are paid through payroll (usually every month).

What are the benefits of hiring independent contractors?

When deciding whether to hire a contractor or an employee for a particular role, you should assess each scenario on its own merits.

In general, though, there are multiple advantages to working with independent contractors.

Access to high-quality global talent

According to Francesco Cardi, Remote’s VP of Operations, we’re entering a contractor-driven work reality. 

This is a natural consequence of the remote-first operations model, which removes geographic constrictions when looking for the best talent. As a result, you can now successfully manage some of the world’s highest-skilled individuals, many of whom are leaving their 9-to-5 jobs to pick and choose their own projects.

This is a win-win scenario for both parties. While your contractors gain project variety and experience in their daily work, you get to fill personnel gaps quickly with qualified, talented people. 

Savings on employee-related expenses

Hiring and onboarding new employees isn’t cheap. 

In the US, for example, the average employer spends $4,700, on average, for each new employee. 

And it doesn’t stop there. One study suggests that the average business invests $1,280 per employee per year to support their workplace training and development.

All of these costs can be minimized — or even avoided entirely — when working with a competent, qualified, well-sourced independent contractor.

Greater flexibility and speed

When you work with contractors, there is less paperwork and practically no onboarding required (or at least certainly not as extensive as with employees).

If speed is important (i.e. a certain project needs to be completed within a strict time frame), you can hire a contractor and have them working on that project almost instantly. And, since they're experts in their field, you will see a tangible impact on your business.

If you're happy with their work, and the relationship is mutually agreeable, you can extend the agreement. You could even convert them into an employee, saving you a long and costly recruitment search.

Minimal training

Contractors are typically experts in their field and need very little training to begin working and making an impact. All you need to provide is the relevant and necessary materials to work effectively — no other formal training should be required. 

For instance, if you hire a contractor to write blog articles, you need only supply your company’s style and brand guidelines and links to previously written articles.

“Our clients prefer hiring contractors to reduce costs, enhance speed and scalability, and minimize risk. Contractors present a cost-effective solution, allowing businesses the flexibility to swiftly recalibrate their workforce as circumstances demand."

– Nuno Covas, COO, Mangtas, B2B remote staffing platform

What are the drawbacks of hiring an independent contractor?

While there are numerous benefits to working with independent contractors, you should also be aware of some disadvantages.

Retention and focus

Independent contractors only work for the specific terms of the contractual agreement. Since they work for themselves, they won’t hold particular loyalty to your business and could even shift their talents to a competitor down the road.

Independent contractors are also less likely than employees to feel as engaged with the business. Since they focus on their specific agreement with you, they might not be aware of your long-term mission, vision, and values.

If you hire independent contractors for short-term agreements, your business needs to be prepared to exert additional time and energy to recruit new workers frequently.

Misclassification risk

Hiring independent contractors comes with an inherent risk of misclassification. Businesses that incorrectly classify workers as independent contractors may incur costly fines, penalties, and reputational damage.

Global businesses need to understand the nuances of employee classification in each country they hire in. Independent contractors have more control over their own products, so employers who try to establish control may also risk misclassification.

Copyright ownership

Your business needs to complete written agreements establishing rights to intellectual property (IP) to avoid battles over them. 

With employees, you would automatically retain the rights of ownership. With independent contractors, you must clearly outline who is entitled to what.

Potential legal issues

Independent contractors are not bound to the same security restrictions as employees, and they typically use their own equipment, resources, and materials. So, if you are not responsible for their WiFi network, for example, how can you guarantee the security of your product?

It’s important to consider compliance with tax, employment, and labor laws, too, when it comes to independent contractors — especially if you expand to other countries.

Increased liability

Work-related injuries leave companies vulnerable if their independent contractors don’t have private insurance. In addition, if independent contractors cause damage or engage in misconduct, legal ramifications for their employers could result.

As independent contractors work independently, decreased supervision or lack of oversight could lead to other issues. Employers should ensure that completed projects are reviewed and inspected before they are delivered or implemented.

Examples of independent contractors 

Independent contractors can provide almost any kind of service or product in any kind of industry. Here are a few examples of how businesses can use independent contractors. 

Consulting

Many contractors leverage their expertise in a particular field or sector by offering consulting services. If you need help, guidance, or advice on managing or improving a specific process, then hiring a contractor with the relevant expertise is a simple, cost-effective way to do so.

Content creation

Another useful way to leverage independent contractors is for content creation. Many contractors offer their services as writers, editors, graphic designers, animators, video producers, and more. This is an ideal solution if you want to grow or bolster your existing in-house team for larger one-off projects or marketing campaigns.

Professional services

Many professionals, including accountants, lawyers, and tax specialists, offer their services as contractors. This is particularly useful for smaller businesses who need help with specific tax, legal, or accounting obligations, but don’t have the budget or the requirement to hire someone full-time or in-house.

Technical solutions

If your company wants to build a technical or digital tool, such as a mobile app, website, or proprietary software, hiring a contractor (or a team of contractors, depending on the project scope) is an ideal short-term solution.

Independent contractor agreements 

An independent contractor agreement specifies the terms and conditions of the relationship between you (the client) and the contractor. 

As a minimum, it should address:

• The scope of work

• Remuneration

• The duration of the contract

• Pay cycles (and method)

It’s important to understand that there isn’t a one-size-fits-all template for contractor agreements. They must be compliant with your contractor’s local labor laws, and account for any other local tax and legal peculiarities. As a result, the more external talent you work with — and the more countries they’re based in — the more customized your agreements need to be.

Each agreement should also address the issue of copyright and intellectual property (IP) ownership. It’s crucial to specify who the owner of the work/deliverables produced by the contractor is. Otherwise, the authorities in the contractor’s country of residence may assign rights to the work based on the IP address of where it was produced.

Remote can help you cover all these bases. Our local, on-the-ground legal experts will vet all your contractor agreements to ensure they comply with local tax and labor laws.

Paying independent contractors

Payment is a key consideration when working with contractors. There are many different ways to calculate rates; each contractor may have their own preferences.

The contractor also has more bargaining power. When you offer a salary package to employees, there may be some room for negotiation on the candidate’s part.

However, remember that you are the client when dealing with contractors. It’s doubtful that the contractor will adjust their rates for you, and they probably won’t appreciate you asking.

Here are some of the most common ways that contractors calculate their pay rates:

• Time-based: The contractor works at an hourly or daily rate.

• Project-based: The contractor quotes a project rate based on the task description. 

For example, if you commission a 2,000-word blog article and the contractor quotes a price of $500, you will pay this regardless of how long it takes to write.

• Measurement-based: The contractor charges a specific (usually very small) rate per commodity. This is common when working with writers and translators, who often charge per word.

• Retainer: The contractor charges an ongoing monthly fee for agreed-upon services. 

For instance, you might pay a lawyer a monthly retainer of $2,000 for 20 hours of work each month, with the exact tasks and responsibilities agreed beforehand. Note that the contractor would still have to issue an invoice for each month.

Some contractors may ask you to pay them before the start of a project, either partially or in full, especially if you’re a new client and there is no prior relationship. In most cases, you settle the payment after the contract is deemed “complete.”

Paying international contractors

Paying international contractors can be a little trickier. 

Contractors set their rates in line with their living costs and the average market rate in their country. Depending on where your contractor is based and where your company is based, this can work positively or negatively for you.

You also have to consider how you’re going to handle payments. Different contractors in other countries may prefer different methods and tools, and if you’re paying in a different currency, there are exchange rates to factor in.

To simplify this process, you can use a dedicated aid, like Remote’s Contractor Payout Explorer. This quick, free, and easy-to-use tool allows you to see:

• Which currencies you can pay in

• The various withdrawal options (across Wise, Stripe, and Connect)

• The approximate payout speed for each option

Remote also enables you to quickly, easily, and compliantly pay contractors across the globe in over 100 currencies — often with just a single click.

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Misclassification risk

As mentioned, misclassification is a significant legal risk that you need to be aware of when hiring contractors.

Misclassification occurs when you treat contractors like employees. For example, you may provide them with tools and equipment, offer them benefits and other perks, or dictate how their work should be done. However, you are not meeting your tax and legal obligations as an employer.

If the authorities believe you are misclassifying a contractor, they will demand that you start fulfilling these legal responsibilities. This means providing, and usually backdating, statutory benefits, tax compliance, social security obligations, and all other associated employer costs in that country. 

There may also be reputational damage through disgruntled workers or negative press coverage.

If you are found to have deliberately misclassified contractors, you can expect to receive fines, penalties, and, in some extreme cases, restrictions on your business.

How to avoid misclassification risk

In most countries, the criteria for correct worker classification is transparent. Many governments have even introduced online tools to help companies classify contractors correctly.

However, it’s still easy to accidentally misclassify people. For example, 1 to 2 million construction workers in the US were misclassified last year. When you factor in the additional complexities of hiring internationally, staying on top of everything can be difficult.

In reality, there is no one fail-safe way to avoid misclassification risk. Instead, it’s about constantly monitoring and reassessing your relationships with your contractors. You need to understand what it means to be an independent contractor and how it influences your hiring decisions.

Remote’s contractor compliance checklist is an excellent resource for guiding you through this process and helping ensure you don’t miss anything.

If you believe your contractor is at risk of misclassification, then it’s advisable to convert them into an employee.

FAQs for hiring independent contractors

Here are a few common questions and answers about hiring independent contractors:

How does an independent contractor pay taxes?

Independent contractors are responsible for withholding, submitting, and filing all appropriate taxes to federal, state, and local governments. 

In the US, independent contractors are subject to a self-employment tax. This is the contribution to Social Security and Medicare that the employer would otherwise withhold. 

How do you pay independent contractors?

Businesses must comply with the regulations established through the tax, labor, and employment laws of each country they hire in. In Mexico, for example, companies must pay each worker in their local currency.

Independent contractors can be paid through various means, such as checks, ACH transfers, or online payment systems.

How do you fill out a W9 as an independent contractor?

Form W-9 is the document that provides your Taxpayer Identification Number (TIN) to your employer for their own tax-filing purposes. Complete it line by line, ensuring your name matches the one on your independent tax return. 

If you have a business name, add it next. If you don’t, you can leave that line blank. Check the Federal Tax Classification box if you are in individual, sole proprietor, or single-member LLC.

What are some best practices for hiring independent contractors?

Do your research. Evaluate each country so you can offer competitive salaries and compensation based on market rates and trends. 

With Remote, you can also provide exclusive health benefits and other desirable perks.

Also, make sure your written contracts have clear definitions, expectations, pay scales, deadlines, and any other necessary information. That way, if an issue arises down the line, it can be resolved quickly.

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Managing global contractors at scale

With remote work fully in the mainstream, companies everywhere have instant access to some of the world’s top talent. When it comes to filling talent gaps, the possibilities are endless.

You can enjoy the convenience of working with domestic contractors, or leverage the diversity and expertise of international specialists. You can save time and money. You can approach projects and tasks with greater flexibility, and without compromising quality.

But to reap all these benefits, you still need to pay attention to the small print. The more contractors you hire (particularly abroad), the more labor laws and tax regulations you need to comply with.

The good news is that you don’t need to be an international lawyer or HR expert to manage all of this. Our Contractor Management service does all the heavy lifting, including:

• Ensuring compliance with local labor laws, including tax filing and reporting

• Protecting your IP rights

• Vetting contract agreements through our local, in-house experts

• Providing accessible, self-service onboarding

• Outlining competitive, market-researched benefits packages

• Approving or rejecting contractor invoices in a single click

• Handling contractor payments quickly and in the right currency

Interested in hiring an independent contractor for your business? Learn more about how Remote solutions and expertise help you hire, manage, and pay your contractors, no matter where they are.