Quick answers for consultants, freelancers, and contractors.

What is an independent contractor?

An independent contractor (IC) is someone who runs his or her own business. Independent contractors earn their livelihoods from their own independent businesses instead of depending upon an employer to earn a living. Independent contractors are sometimes called consultants, freelancers, self-employed, and even entrepreneurs and business owners.

Unlike an employee who works for one employer, independent contractors typically work for a number of different clients, tackling particular jobs or projects that require special expertise.

What are the benefits and drawbacks of being self-employed?

There can be many advantages to being self-employed:

• You are your own boss.
• You may be paid more than employees.
• No federal or state tax is withheld from your pay.
• You can take increased business deductions.

Despite the advantages, however, being self-employed is no bed of roses. Here are some of the major drawbacks.

• You have no job security.
• You might not get paid.
• You must pay self-employment taxes.
• You may be personally liable for business debts.
• You have no employer-provided benefits.
• You have no unemployment insurance benefits.
• You have no employer-provided workers' compensation.
• You have few labor law protections.

Do I need to use written agreements when I do contract work for clients?

You really should. Using a written agreement avoids disputes by providing a written description of the services you're supposed to perform, when they are to be performed, and how much you will be paid.

A written independent contractor agreement can also help establish that you really are an independent contractor -- not your client's employee. Although an agreement by itself doesn't definitively prove that a worker qualifies as an independent contractor, it will help show the IRS and other agencies that both you and the hiring firm intended to create a hiring firm-independent contractor relationship, not an employer-employee relationship.