Independent Contractor Law

Updated September 12, 2023
10 min read
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As an independent contractor, you have certain rights that you should know and understand. Independent contractor law protects individuals who are not employed by a company but, rather, are engaged in their own business or who complete specific jobs or tasks as one-time projects.

This guide will provide an overview of independent contractor law, what it means for the contractor, and how to ensure that the rights and obligations under this law are upheld. Knowing your rights is one of the best ways to stay protected and succeed as an independent contractor.

What Is Independent Contractor Law?

If you’re an independent contractor working in the United States, you may ask what is the new independent contractor law. These laws provide essential protections to independent contractors and include the right to control how and when they do their work, to be free from discrimination, and to receive payment for their services.

Independent contractor law also ensures that independent contractors are adequately compensated for their work and guarantees certain rights in areas like taxation. In addition, employers must provide workers’ compensation benefits to independent contractors in some states.

Knowing your rights is critical to ensuring that you receive fair compensation for your services. If you plan to work independently, plan to familiarize yourself with the laws in your state to ensure that you get the protection and compensation you deserve.

Independent Contractor Classification

Are you an independent contractor looking for clarity on your rights and responsibilities? The U.S. legal system provides specific independent contractor laws and definitions for both employees and independent contractors, so it’s essential to know the category under which your work is classified.
The first distinction between the two is the control exerted over the person’s work. Employees are usually subject to greater control by their employer, while an independent contractor may have more control over when, where, and how he or she does the work.

Next is the nature of the relationship between the worker and the employer or client. Employees often have long-term relationships. Independent contractors, however, will usually be engaged for a short-term project or task with no expectation of future work.

If you’re unsure whether you should be classified as an employee or an independent contractor, consider consulting a lawyer experienced in labor law for help determining what rights and obligations apply in your situation.

What Rights Do Independent Contractors Have?

Independent contractor law in the U.S. gives certain independent contractor rights to contractors when it comes to their work.

Demand a Legally Binding Contract

Be sure to have a legally binding contract that outlines the arrangement with the client. This will ensure clarity over who is responsible for what and limit misunderstandings or disagreements. Carefully read the contract before signing it, ensuring that all your key points are clearly outlined. This will ensure that the agreement complies with independent contractor law.

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Know Your Rights

It’s also important to know your independent contractor rights according to the independent contractor laws in your state or local jurisdiction. This will ensure that you get proper remuneration for your work and outline any potential issues with taxes, filing deadlines, and other related matters.

Choose Your Client and Payment Method

As an independent contractor, choose your clients and payment methods wisely. Make sure that the client is reputable and clearly communicates the payment schedule so that there won’t be any surprises later. 

Additionally, make sure to use a secure payment platform for a smooth transaction. Various independent contractor laws have been made to protect both the client and the independent contractor.

Clarify Your Employment Status

Make sure to clarify with your clients whether they consider you an employee or an independent contractor. The worker’s status can affect taxes, deductions, wages, and other important matters related to working with the client. Knowing your employment status can help keep things clear and prevent unwelcome complications.

Federal Regulations and Laws for Independent Contractors

An independent contractor may want to know a few federal regulations, rules, and independent contractor laws. It’s important to note that, when government agencies like the Fair Labor Standards Act (FLSA) are involved, they take precedence over state regulations and laws.

The following are some of the critical things to know about federal regulations for independent contractors:

Tax Filing Requirements

Independent contractors are obligated to file a 1040 Form every tax year. This form reports income to the Internal Revenue Service (IRS). Filing correctly will help the taxpayer to avoid penalties or other complications.

Unemployment Insurance

Unemployment insurance is available for those who’ve lost their jobs through no fault of their own. Unfortunately, independent contractors do not qualify for those benefits. 

Employers must pay state unemployment taxes on wages paid to employees — not independent contractors. Therefore, an independent contractor won’t receive any financial benefits for unemployment unless special provisions apply to his or her state, such as in New Jersey, where a person may qualify for unemployment benefits as an independent contractor.

Rights Under the FLSA

The FLSA sets standards for minimum wage and overtime pay, which apply to some kinds of workers, including employees but not independent contractors. 

Independent contractors have different rights and responsibilities than employees, which are generally reserved for a union or state labor board to oversee rather than the Fair Labor Standards Act.

State Laws and Rules for Independent Contractors

Different states may have different independent contractor laws and rules that apply to independent contractors in the U.S. These laws help to ensure that independent contractors have the same rights and benefits as traditional employees.

Tax Requirements

Unlike traditional employees, independent contractors are responsible for calculating and paying their own taxes. This means reporting income, paying self-employment taxes, and filing annual tax returns. Depending on where the contractor lives, state income tax may also be required.

Eligibility for Benefits

Independent contractors are not eligible for employee benefits like health insurance, paid time off, and retirement plans from their clients. This is because independent contractors are self-employed individuals responsible for paying their own taxes and expenses and have more control over their work than employees have.

However, there are some benefits that independent contractors may be eligible for, including: 

  • Deducting business expenses, such as tools, equipment, and office space costs, from their taxes. 

  • Claiming certain tax credits, such as the home office deduction.

  • Purchasing health insurance through the Affordable Care Act’s Marketplace.

  • Opening retirement accounts, such as a SEP-IRA or Solo 401(k).

Independent contractors should understand their eligibility for benefits and take advantage of the available options. 

Employee Classification Rules

Employee classification is an important issue that is governed by a set of rules and regulations. Employers should understand how to correctly classify their workers — as employees or independent contractors — since misclassifying in-house professionals can have severe legal and financial consequences. The most common classifications of workers are full-time employees, part-time employees, and independent contractors. 

Full-time employees typically work 40 hours per week and are entitled to benefits that can include health insurance, paid time off, and retirement plans. Part-time employees work fewer than 40 hours per week and may be eligible for some benefits depending on the employer. Independent contractors are self-employed individuals who work on a contractual basis and are responsible for paying their own taxes and expenses.

To determine whether a worker is classified as an employee or an independent contractor, the Internal Revenue Service (IRS) uses a set of guidelines that consider factors like:

  • The degree of control the employer has over the worker’s work

  • The worker’s investment in tools and equipment

  • The degree of independence the worker has in performing the job

Misclassifying employees as independent contractors can result in fines and back taxes. In recent years, there has been increased scrutiny of employee classification, with many states enacting their own laws to ensure that workers are correctly classified and receive the benefits and protections they are entitled to. Employers must understand and comply with these rules to avoid legal issues and maintain a positive relationship with their employees.

Knowing your rights under U.S. law as an independent contractor can help protect your status as a freelancer or contractor and ensure that you get fair treatment from clients. Keeping up with changes is important. By doing so, you can ensure that your rights are respected by employers and clients alike.

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Frequently Asked Questions

What does an independent contractor do about taxes?

Independent contractors must pay self-employment taxes on income. This includes calculating quarterly estimated taxes and remitting this amount when it comes due. Some independent contractors may also be required to apply for a federal tax ID and obtain a business license for their state or locality.

Should an independent contractor hire a lawyer?

Any independent contractor may consult with a lawyer or financial advisor with questions related to labor law or taxes. The laws that apply to independent contractors vary by state, so working with a professional can help to ensure compliance with all applicable rules and regulations.

What are some resources for independent contractors?

Several entities, including the United States Department of Labor (DOL), are designed to help independent contractors stay informed on their rights. Also, different states have signed Memorandums of Understanding relating to the various laws regarding independent contractors. A list of states and their memorandums is available on the DOL website. Also, many states have websites listing labor laws that may apply specifically to an independent contractor’s area.

What is an example of an independent contractor?

An independent contractor is a self-employed provider of goods or services on a contractual basis. Independent contractors are not company employees. Therefore, they pay their own taxes and benefits and have their own applicable independent contractor laws. They have flexible schedules and work with different clients rather than one employer. Many industries, including software development, regularly engage independent contractors.

How does the labor law affect an independent contractor?

U.S. labor laws differ from independent contractor law. Independent contractors have limited protection compared to traditional employees, including the following: 

  • Contractors are responsible for their own taxes, insurance, and benefits. 
  • Contractors do not receive minimum wage, overtime, workers’ compensation, or union rights. 
  • Contractors are governed by independent contractor law. 
  • There is a distinct difference between an employee and an independent contractor, which often leads to confusion and legal disputes.