Definition
An independent contractor is a self-employed worker who provides services to a business under a contract and controls how the work is done, rather than being an employee. The business generally does not withhold taxes or provide employee benefits, but must classify the worker correctly under federal and state law.
Also known as: contractor, 1099 worker, independent contractors
How it works
Classification depends on the real working relationship, not the label in a contract. The IRS applies a common-law test looking at three categories: behavioral control, meaning whether the company controls how the worker does the job; financial control, such as how the worker is paid and who supplies tools; and the type of relationship, including written contracts, benefits, and whether the work is central to the business.
The Department of Labor separately assesses status under the Fair Labor Standards Act, where employees are entitled to minimum wage and overtime. DOL published updated regulations at 29 CFR Part 795 in March 2024. Misclassification, treating an employee as a contractor, can cost workers wage protections and expose the business to back taxes and penalties. Workers or businesses unsure of status can ask the IRS for a determination on Form SS-8. State tests may be stricter.
Example
A marketing agency hires a freelance designer who sets her own hours, uses her own software, and serves several clients. The agency pays per project on an invoice and does not withhold payroll taxes.
How it differs from similar terms
Independent Contractor vs Employer of Record. An independent contractor works for themselves under a services contract, while an employer of record legally employs a worker on behalf of the client company and runs payroll and compliance for them.
Independent Contractor vs Payroll Tax. Payroll taxes apply to employees through withholding and employer contributions. Contractors generally pay their own taxes.
Free checklist
Buyer's checklist: Independent Contractor Management Software
Everything to check before you sign with a independent contractor management provider, on one printable page.
- 9 questions to ask every vendor, with how to verify each answer
- 11 capabilities to confirm in a demo
- 5 pricing questions about fees outside the quote
- A scorecard of the 5 products we rank highest, with what we verified
Facts as of Oct 25, 2026 · LeadChange Research Team
What it checks
- Payee onboarding and tax documentation
- Payment coverage and rails
- Classification support
- Contracts and statements of work
- Invoice and approval workflow
- Year-end reporting
- Accounting and payroll integration
- Fees and foreign exchange transparency
and 1 more question in the full checklist
Sample question
Payee onboarding and tax documentation
Ask which tax forms are collected for domestic and foreign payees, how they are validated, and who is notified when one is missing.
Frequently asked questions
What is another name for an independent contractor?
The IRS treats independent contractors as self-employed. Businesses also call them freelancers or consultants, and the IRS reports their pay as nonemployee compensation.
How do I know if I am an independent contractor or an employee?
Look at who controls the work. The IRS weighs three groups of facts: behavioral control (who decides how the job is done), financial control (who sets pay, covers expenses and supplies tools) and the type of relationship (contracts, benefits and how lasting the work is). No single fact decides it.
What is the difference between self-employed and an independent contractor?
Very little for tax purposes. The IRS says a person who provides services to other businesses as a contractor is generally self-employed. Self-employed is the broader term: it also covers owners who sell products rather than services.
Is a gig worker an independent contractor?
Often, but not automatically. Gig platforms usually treat workers as contractors, yet the same tests apply as for any worker. Under the Fair Labor Standards Act, the economic reality of the relationship decides employee status, not the label the platform uses.
How does the IRS decide if a worker is a contractor?
The IRS uses the common-law test across behavioral control, financial control and the type of relationship, and looks at the whole relationship. Workers or businesses can ask the IRS for an official decision by filing Form SS-8.
What happens if a worker is misclassified?
The Department of Labor says misclassification happens when an employer treats an employee as a contractor. The worker can lose minimum wage and overtime protections, and the business can face back taxes and penalties.
Compare independent contractor management options
See every independent contractor management product we rank, with verified prices and features.