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Submitted: 2010-05-17 15:21:43 | Word Count: 870
An independent contractor is a natural person, business, or corporation that provides goods or services to another entity under terms specified in a contract or within a verbal agreement. Unlike an employee, an independent contractor does not work regularly for an employer but works as and when required, during which time she or he may be subject to the Law of Agency. Independent contractors are usually paid on a freelance basis. Contractors often work through a limited company, which they themselves own, or may work through an umbrella company.
In the United States, any company or organization engaged in a trade or business that pays more than $600 to an independent contractor in one year is required to report this to the Internal Revenue Service (IRS) as well as to the contractor, using Form 1099-MISC. This form is merely a report of monies paid; independent contractors do not have income taxes withheld from their pay as regular employees do. When computing taxable income on the federal income tax return, the independent contractor can deduct, from his gross income amount, the amount work related expenses, such as tools or safety gear needed for the work that were purchased by the contractor himself.
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Sometimes, it is not a straightforward matter to determine who is an independent contractor and who should be classified as an employee. To make a determination, the IRS advises taxpayers to look at three aspects of the employment arrangement: financial control, behavioral control, and relationship between the parties. While some independent contractors may work for a number of different organizations throughout the year, there are also many who retain independent contractor status even though they work for the same organization for the entire year.
Generally speaking, independent contractors retain control over their schedule and number of hours worked, jobs accepted, and performance of their job. This contrasts with the situation for regular employees, who usually work at the schedule required by the employer and whose performance is directly supervised by the employer. However many companies (particularly in the freight transport industry) specify the contractor's schedule, require purchase of vehicles from the company and prohibit work for other companies.
Life as an independent contractor has both benefits and hindrances.
Pros
* Since they are rarely tied to an employer, they are free to set their own rules of business, limited only by bargaining power.
* Since they usually develop a large network of clients, the loss of one or two often has a negligible effect.
* Many people simply like the idea of "being your own boss." Aside from materialistic benefits, many people simply enjoy not having to answer to a supervisor.
* As an artist/author of any tangible artwork, such as paintings, sculptures, photographs, or written works, you are entitled to exclusive copyright ownership if you created the work as an independent contractor. If you created such works while in the employ of another person or corporation, the rights belong to the employer (under most standard employment contracts).
Cons
* In the United States fraudulent classification of employees as "independent contractors" in order to avoid taxation and regulation is widespread.
* Most independent contractors are usually also owners of a sole proprietorship, and as such, bear all the expenses of their product, which can be made up only by charging customers accordingly.
* Income taxes for independent contractors are drastically more complicated than of employees.
* There are several monetary incentives that are guaranteed to employees in the United States, but not independent contractors. Examples include worker's compensation and unemployment insurance.
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