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.
Related terms and guides
Frequently asked questions
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. No single factor decides the outcome. The IRS reviews the whole relationship, and workers or businesses can request an official determination by filing Form SS-8.
What happens if a worker is misclassified?
The DOL notes that misclassification occurs when an employer treats an FLSA employee as a contractor, and the worker may lose minimum wage and overtime protections. The business can also face tax and penalty exposure. Employers should review classification carefully and seek legal advice when unsure.