‍What Is an Independent Contractor?

You may have encountered someone who identified themselves as an independent contractor. An independent contractor is a self-employed individual or entity hired to perform work or provide services to another entity while operating independently without a traditional employee relationship structure. Independent contractors handle their tasks, manage their schedules, and deliver results on their terms. 

But what qualifies someone as an independent contractor? How does this role open doors to greater flexibility and control in your career?

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Independent Contractors vs. Employees

If you're new to the workforce, the differences between employees and independent contractors may need to be clarified. Each type has distinct responsibilities, rights, and expectations, impacting everything from job security to the necessary tools. Here’s a straightforward breakdown to help you understand what sets them apart.

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Independent Contractors

Independent contractors are self-employed individuals who work independently for clients and not under a single employer. Typically. they handle their schedule, choose their work methods, and contractually complete specific projects or tasks. Independent contractors often work in consulting, freelancing, and various professional services, such as lawyers and accountants.

According to the IRS, independent contractors are defined by their control over how and when they complete their work. Clients may specify the project outcome but leave the process up to the contractor.

Furthermore, independent contractors are responsible for supplying their tools, equipment, and resources. For example, a contractor might use their computer, software, or specialized tools to complete a project.

Pros: Contractors enjoy flexibility, the freedom to work with multiple clients, and often the potential to earn more based on their skills and project workload.
Cons: Contractors manage their taxes, benefits, and retirement plans, and they usually need more job security than employees.

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Employees

Employees work directly for an employer, usually under set hours and specific duties outlined by the employer. Employees follow company guidelines, and their employer controls how, when, and where the work is done. Employees might be full-time, part-time, or temporary but generally work under the company’s continuous guidance and are paid regularly.

If an employer can control both the result and how the work is performed, the individual is likely an employee. The employer sets standards, provides direction, and defines expectations.

Regarding tools and resources, employers typically supply the necessary equipment for employees to perform their work. For instance, a company might provide a computer, software, or other equipment, enabling employees to complete tasks according to the company’s standards.

Pros: Employees receive steady incomes, job stability, and access to health insurance, retirement plans, paid leave, and unemployment insurance.
Cons: Employees may need more flexible schedules and must adhere to company policies and hours.

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Whether you work as an independent contractor or employee impacts everything from your benefits to the tools you’ll need and the taxes you pay. This clarity helps workers and employers comply with tax laws and avoid potential misclassification issues. Understanding these distinctions empowers you to make informed decisions that align with your career goals and lifestyle.

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Tax Responsibilities for Independent Contractors

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1. Understanding Self-Employment Tax

Self-employment tax is essentially the combination of Social Security and Medicare taxes that employees and employers typically split. However, you’re responsible for the full amount as a self-employed individual. For 2024, this includes:

• 12.4% for Social Security on the first $168,600 of your net income.
• 2.9% for Medicare on all net income.
• An additional 0.9% Medicare tax may apply if you’re a single filer earning over $125,000 or married filing jointly earning over $200,000.

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2. Reporting Income and Business Expenses

As an independent contractor, your income is reported to the IRS on Form 1099-NEC, which you’ll receive from clients who paid you more than $600. You’ll use this information to report your income when you file your taxes.

You must also report income and expenses on Schedule C of Form 1040. This is where you can deduct eligible business expenses, including office supplies, travel costs, or software you use for your business. Deducting these expenses lowers your net income, reducing your taxable income and the amount you owe in self-employment tax.

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3. Paying Estimated Taxes Quarterly

Unlike employees, independent contractors don’t have tax withheld from their paychecks. Instead, you’re expected to pay estimated taxes every quarter. These quarterly payments are essential to avoid underpayment penalties during tax season. You can make these payments using Form 1040-ES, which helps calculate the amount based on your income for that quarter.

For example, if your income varies, you may owe different amounts each quarter, so keeping track of earnings and expenses throughout the year is exemplary. Estimated taxes are typically due in April, June, September, and January of the following year.

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4. Additional Taxes: State Sales Tax

Depending on the type of services or products you offer, you might also need to pay state sales taxes, mainly if you’re producing physical goods. This varies by state, so checking your state’s official tax website to ensure compliance is essential.

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5. Retirement Options

As an independent contractor, you can also access retirement options like the Simplified Employee Pension individual retirement account (SEP IRA), Savings Incentive Match Plan for Employees (SIMPLE) IRA, and solo 401(k), which can help you save for the future while reducing your taxable income. However, unlike traditional employees, you’ll fund these accounts independently, as you’re both the employer and employee.

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6. Benefits Not Available to Independent Contractors

It’s important to remember that, as a self-employed individual, you won’t have access to unemployment insurance or workers’ compensation, which traditional employees may have. Therefore, budgeting for emergencies or securing personal insurance can help provide financial stability in the long term.

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Connect Seamlessly With Employers Using Swob

Finding the right job as an independent contractor can be challenging, especially when you want flexibility and control over your work. Swob is here to make this process easier by connecting independent contractors with businesses that need skilled talent quickly and seamlessly.

With Swob’s swipe-based platform, you can avoid endless job boards and complex applications. Swipe on jobs that match your expertise and start connecting instantly. Swob’s user-friendly design ensures that finding the perfect opportunity is accessible and straightforward. Are you ready to land your next contract? Download Swob today and start swiping your way to new opportunities!

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