Are independent contractors self-employed?

The 2008 economic recession opened the door to the rapid expansion of the gig economy.  Before long, the gig economy had grown tremendously, and new laws and regulations were introduced that govern and protect gig workers. These regulations classified the differences between independent workers and employed people, the tax obligations surrounding each, and the requirements to fulfill for each category.

The gig economy is still growing, and the number of independent contractors is increasing daily. A 2022 survey found that around 59 million workers in the U.S. are classified as independent workers, which equates to 36 percent of the U.S. workforce.

So, if you’re looking to hire and pay independent contractors in your team, it’s best to understand whether you would consider an independent contractor self-employed. Keep reading to learn more.

Who is an independent contractor?

The IRS categorizes attorneys, healthcare providers, tutors, and other professionals who offer independent services as independent contractors. They can be writers, software engineers, musicians, contractors, subcontractors, or other working professionals who offer independent services to the public.

Simply put, an independent contractor is a self-employed individual or business that offers services to clients or customers on a project-by-project basis. Unlike employees, independent contractors enjoy liberty and freedom in their work and can benefit your business immensely.

Contractors don’t form part of a company’s workforce. It also means contractors must manage their business operations, including their tools, set their rates, and comply with tax obligations.

Even though they work independently, the law requires independent contractors to track all earnings they receive from clients. On the other hand, clients are legally mandated to issue 1099-MISC forms to contractors for expenses paid in exchange for services. As an employer, you must issue a 1099 form to an independent contractor if they receive over $600 from you in a year.

Talk to Skuad experts to learn how to hire an independent contractor.

What differentiates an independent contractor from employees?

The U.S. labor law has three categories to help you differentiate between independent contractors and employees. Let’s cover them below.

Business control

Independent contractors typically have more autonomy and less control by the business entity over their work. In contrast, employees may be subject to more direction and control by their employer.

Working with independent contractors also requires your business to be in IC compliance. This ensures that you adhere to relevant laws and regulations regarding the classification and treatment of independent contractors.

Contractual relationship

A major difference between an independent contractor and an employee regarding a contractual relationship is the employer's level of control over the person providing services. While an employer has more control over an employee, such as setting their work schedule and providing training, an independent contractor typically has more control over when and how they perform their work.

Behavioral control

Behavioral control of independent contractors is minimal; you can only control specific aspects of an independent contractor. Remember, they have more autonomy over their work than employees. An employee typically has less control and follows specific instructions given to them by their employer.

What does “self employed” mean?

Being self-employed means that an individual works for themselves and is not an employee of another company or organization.

While the legal definition of self-employment is not clearly defined in the United States, the Internal Revenue Service (IRS) provides guidelines for determining whether a worker is an employee or an independent contractor for tax purposes.

Types of self-employed business structures

Individuals who want to get into self-employment can use one or a combination of the following business structures:

• Sole proprietorship. Typically an unincorporated business owned and operated by one person.
• Partnership. This structure works when two or more people share ownership of a business.
• Corporation. Categorized as either C or S, a corporation is a legal entity separate from its owners.
• Limited Liability Company (LLC). An LLC is a hybrid structure that combines a corporation's liability protection with a partnership's tax benefits, making it ideal for self-employment.

Independent contractor vs. self-employed: what are the differences?

While the words independent contractor and self-employed are sometimes used interchangeably, the two do not mean exactly the same thing. Here are some notable differences between self-employed and independent contractors:

Business structure

Independent contractors are not a separate legal entity from the person who performs the work. They are self-employed, but they do not necessarily own a business. On the other hand, self-employed individuals are business owners who work for themselves. They may operate business structures such as a sole proprietorship, partnership, LLC, or corporation. They may have employees or contractors working for them.

Tax deductions

Both independent contractors and self-employed individuals must adhere to tax guidelines, including self-employment and income tax.  For instance, an independent contractor can deduct expenses related to the specific project or job they are working on, such as travel expenses. These deductions help lower their taxable income.

On the other hand, self-employed individuals can deduct expenses related to running their business, such as rent, utility bills, and insurance, on Schedule C of their tax return. However, they may be unable to deduct their business expenses if their expenses exceed their income.

Insurance

Independent contractors and self-employed individuals are responsible for obtaining insurance coverage, as employers’ insurance policies do not typically cover them.

However, the specific insurance requirements and options can vary depending on the individual's profession and the nature of their work. For instance, a self-employed architect may need professional liability insurance to protect against claims of errors or omissions. In contrast, a self-employed landscaper may need general liability insurance to protect against property damage or bodily injury claims.

Licenses

Licensing requirements for independent contractors and self-employed individuals vary depending on the following:

• Type of work
• State and local laws

Depending on the nature of their jobs, independent contractors and self-employed individuals should possess specific licenses, permits, or certifications to perform and operate their businesses legally.

Is an independent contractor self-employed?

Yes. The law considers independent contractors self-employed since they work for themselves. However, one needs to note that not all self-employed individuals are independent contractors.

Check here to see the benefits of being an independent contractor.

Planning to hire independent contractors? Here is how Skuad can help

When it comes to managing your independent contractors, Skuad offers a streamlined and efficient way to manage your entire employment lifecycle, from recruitment to termination. This includes onboarding, paying and managing independent contractors on one unified platform. Rest assured, Skuad's expertise helps you stay up-to-date with IC compliance and other employment laws, mitigating the risk of potential legal issues.

To learn more about Skuad, book a demo today.

FAQs

1. Is 1099 considered self-employed?

While receiving a 1099 form indicates that someone is being paid as an independent contractor rather than an employee, it does not necessarily mean the recipient is self-employed.

2. Is an independent contractor a type of employee?

No, an independent contractor is not considered an employee.  

3. Who does the IRS consider self-employed?

The IRS considers someone self-employed if they are in business for themselves and carry on business or trade as a sole proprietor or independent contractor.