An independent contractor agreement is a type of contract that takes place between an employer and an independent contractor or non-employee. Freelance contracts, 1099 contracts are also types of independent contractor agreements.
Suppose you’re planning to hire an independent contractor anytime soon. In that case, it’s time that you understand the basics of an independent contractor agreement and how it works. In this article, we’ll share all those details.
So, let’s begin.
What is an Independent Contractor Agreement?
An independent contractor agreement is a contract or document that employers use to hire a freelancer or consultant. This contract differentiates between an independent contractor and an employee.
An independent contractor agreement can include:
- Specific job responsibilities of the freelancer
- The services they are providing
- The work tenure
- The mode of payment
Like a typical employment contract, an independent contractor agreement includes specific clauses like non-solicitation agreements, non-disclosure agreements, and non-compete agreements.
Plus, there is a written clause in the agreement that is unique for freelancers only. It is the copyright owner of any deliverables produced by the independent contractor. Additionally, an independent contractor also includes the resolution methods to any legal disputes between the contractor and the employer.
What are the Other Names for an Independent Contractor Agreement?
You can use an independent contractor agreement for different purposes. In that case, you’ll have to address it with othert names:
- Electrical contractor agreement
- Painting contractor agreement
- Freelance creative agreement
- Building contractor agreement
- Home contractor agreement
And the list goes on. Based on the responsibilities of the independent contractor, the name of the agreement can change.
What are the Differences between an Independent Contractor and an Employee?
Have you ever wondered, “should I hire a full-time employee or a freelancer?”. Well, this is a very common and valid question. As an employer, it is your responsibility to make an optimal decision. You should be able to figure out by yourself whether an independent contractor or a full-time employee will be the perfect fit for your company.
Here are some fundamental differences between independent contractors and employees that employers should know:
- When hiring full-time employees, employers have to withhold all the tax regiments. This includes social security tax and medicare tax. On the contrary, for independent contractors, there are no such restrictions. Independent contractors handle social security tax and medicare tax by themselves.
- For full-time employees, employers need to fill-up a W2 form for each employee. Alternatively, for freelancers or independent contractors, you need to produce a W9 form. But, here’s the catch. The independent contractor will fill up the W9 form.
- To hire an independent contractor, employers need to file information returns through a 1099-MISC form. This is valid for any payments higher than $600. For employees, there are no such requirements.
How do You Make an Independent Contractor Agreement?
Are you struggling on creating an independent contractor agreement template? Well, it’s not tricky at all.
Follow these three easy steps to create your first independent contractor agreement:
- Answer a few common questions like independent contractor’s name, contact information, responsibilities, payment amount and frequency, payment mode, term of the contract. Consolidate all this information in one place.
- Once the agreement is ready, share it with your legal practitioner. Get their feedback and share the document with the freelancer afterward.
- Make sure that both parties agree with the terms mentioned in the agreement. Also, get it signed by the independent contractor, sign it yourself and keep a copy for any future inconvenience.
5 Mandatory Factors in an Independent Contractor Agreement
An ideal independent contractor agreement should address the following factors:
1. Scope of work
The easiest part of the independent contractor agreement is writing out the scope of the work. All you need to do is outline what the independent contractor needs to deliver in exchange for the payment.
Ensure that you specify the deliverable, regardless of the type of work that needs to be done. For instance, the contractor will deliver a 1000 characters promotional ad for XYZ Ltd. in the form of a downloadable attachment in .png format.
In case your project is complex like real estate projects, you can break down the deliverables into smaller goals or milestones.
As you present the deliverables, provide the timeframe for its completion as well.
In an independent contractor agreement, you must mention the timeline for the work and the expected delivery for the work. Plus, if you have any key milestones along with the completion of the work, mention the deadlines for each.
If your project needs approval from stakeholders, consider it before setting the timeline.
For instance, your ad campaign needs to be approved by the Marketing Director before the final submission. In this case, make sure you set a window for review and edits before paying your contractor.
3. Payment terms
How will you pay the contractor, and when?
The employer must specify the payment terms in the independent contractor agreement after a mutual discussion.
Generally, payment terms include net 30. This means that the payment will be made within 30 days of submitting the invoice. Besides, you might also consider end-of-the-month invoicing, wherein the contractor will submit the invoice at the end of every month.
Several contractors also opt for bi-monthly payments. Typically, contractors might ask for an upfront deposit for complex projects and take the balance after t completion.
Also, remember to specify expenses like who will incur what - conveyance, raw materials, and equipment.
In an independent contractor agreement, the confidentiality section specifies the dos and don’ts related to sensitive information and trade secrets.
What are the guidelines to be followed for such information?
This section mentions that the contractor should not use or download any confidential information encountered during the project for personal gains. Such information must be used only for work purposes with utmost security measures.
5. Termination grounds
On what grounds can the contract be canceled? How much notice must be provided and in what format?
All these questions are generally answered in this section of the independent contractor agreement.
For instance, XYZ Ltd. and contractor shall have the right to terminate the contract at any time for any reason upon delivery of five days prior notice to the other party.
3 Reasons Why a Business Owner Needs an Independent Contractor Agreement
If you are still in doubt as to whether you need an independent contractor agreement or not, here’s why you do need it.
1. Outlining clear expectations
An independent contractor agreement sets out the expectations of the work, its parameters, deliverables, compensation, and the nature of the relationship.
The contract clearly explains how the work will be done, the communication flow, and how the relationship between the company and the contractor will work out.
2. Ownership of the Work
An independent contractor agreement;
- Establishes the ownership of the work product generated from the client-contractor arrangement
- Ensures that contractors protect trade secrets
- Provides for non-disclosure and confidentiality of key and sensitive business information
This ensures protecting your business interest as an employer.
3. Specifying the client-contractor relationship
The responsibilities of employers are different for employees and independent contractors. And an independent contractor agreement affirms these responsibilities and the relationship in writing.
For instance, unlike employees, independent contractors pay their own income taxes and there are no benefits like insurance and paid leave. for them.
An independent contractor agreement ensures that you are protected from any claims of a contractor being an employee for obtaining employee benefits.
Are There any IRS Obligations in Hiring an Independent Contractor?
When hiring an independent contractor, you might have certain IRS obligations.
If you hire a self-employed individual, you will have to fill out Form W-9 and 1099-MISC. Both forms are easily downloadable from the IRS website.
The W-9 form collects their contact information and tax identification number. The 1099-MISC form shows how they report income for income tax returns.If you pay more than $600 annually, you will have to fill out the 1099-MISC form. For satisfying the further IRS obligations, these forms must be submitted before 31st January of the following year.
Make sure to keep a record of the contractor as proof that the individual is not an employee but an independent contractor. Keep a list of the contractor’s qualifications, invoices, and payment proofs and be audit-ready.
How Can You Protect Confidential Information While Working with a Freelancer?
For a fruitful experience with freelancers, you need to have mutual trust. But it is also important to protect confidential business information.
Here are a few tips that would help you protect your trade secrets while working in collaboration with contractors.
1. Get to know the contractor first
Trust is the foundation of collaboration. So, to build trust in your freelancer, make sure you know them well.
Verify their authenticity by visiting their official page, LinkedIn profiles. Check for client ratings, reviews, list of published work, licenses and certifications.
After you have checked out the credentials, conduct a short interview with the freelancer before making a hire.
2. Keep the privacy of your project intact
Keeping the project private does not make it accessible to all freelancers. Only the ones you invite can view it.
But if the project is public, any freelancer will be able to view the details through the Google search results.
It is always recommended to keep your project private and allow only those freelancers to view whom you invite. This keeps the project details confidential. However, it is up to you how you control the privacy settings and visibility of the project.
3. Get an understanding of the terms and conditions
Pay attention to the terms and conditions involved in the collaboration.
Is the IP and confidentiality protection specified? Is the ownership of the work product mentioned?
Make sure you have it all when discussing the terms and conditions of the work with the freelancer. For example, you can include that;
- You reserve all rights to the Intellectual Property
- You grant the freelancer the right to use the materials and business-related information solely for work purpose
- On the completion of the project, all the remaining resources will be returned to you, and copies of the work (if any) will be securely destroyed.
You might choose to add customizations to these terms and conditions as per the nature of your work.
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All the restrictions and obligations of hiring an independent contractor and creating an independent contractor agreement need not be worrying..
If you’re troubled by the prospect of creating a valid independent contractor agreement, you should definitely explore Multiplier. Here’s how our SaaS-based employment solution can help you:
- We can create valid and compliant contracts to hire global freelancers. Multiplier can capture all agreement terms and conditions and generate region-specific contracts effective for both employers and employees.
- Paying global contractors will no longer be a big deal for Multiplier. It ensures that all freelancers residing in different parts of the world are paid at one go.
- With Multiplier, you can offer benefits like health insurance, and other perks to independent contractors.
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