Building Your Business Business Taxes Important Terms in an Independent Contractor Agreement A good contract should protect both of you By Jean Murray Jean Murray Facebook Twitter Jean Murray, MBA, Ph.D., is an experienced business writer and teacher who has been writing for The Balance on U.S. business law and taxes since 2008. She has taught accounting, business law, and business finance at business and professional schools for over 35 years, has authored several books on saving money and simplifying your business, and was the owner of startup-focused company Emence Enterprises, LLC. learn about our editorial policies Updated on September 24, 2020 In This Article View All In This Article What Is an Independent Contractor? What to Include in an IC Contract Restrictive Covenants in IC Contracts Why You Need an Attorney Photo: westend61 / Getty Images Hiring an independent contractor to work for you sounds like it should be easy. There's no complex paperwork like what you need to hire an employee—you just shake hands and get going, right? Not quite. As with any other business relationship, it's important to establish the terms under which you'll work together to avoid conflict and possible lawsuits. This type of contract has some important terms you should include. What Is an Independent Contractor? An independent contractor (IC) has their own business or trade in which they offer their services to the general public. The general rule is that a worker is an independent contractor if the payer has control over the result of the work but not what will be done or how. An independent contractor is considered to be self-employed, as opposed to an employee. They must pay self-employment tax— for Social Security and Medicare—as well as income taxes, but they must pay this on their own. You're not responsible for withholding anything from payments you make to this person. Is This Person Really an Independent Contractor? Before you hire an independent contractor, make sure the individual you're planning to do business with really is an independent contractor. This means this person is free to determine how the work is to be performed, when it's to be performed, and in some cases where it is to be performed. If you assign hours when this person must work and if you have final control of when and how to do the work the person is most likely an employee. Note The IRS determines worker status (IC or employee) on a case-by-case basis. If you aren't sure about a worker's status, you can ask the IRS for a determination for your specific situation. What to Include in an IC Contract The start of a work arrangement is the time to clarify your agreement and the best way to do that is to put everything in writing. You'll be working on assumptions if you don't write everything down and these assumptions can cause problems and can result in costly and time-consuming litigation later. An independent contractor agreement should include several important sections. General Agreement and the Nature of the Work The first part of the agreement is typically a statement by both parties detailing what each will do. For example, the company might agree to pay the contractor for such-and-such work and the contractor agrees to provide the work by a certain date and under certain conditions. The nature of the work should also be described in detail. Exactly what is it that the contractor is going to do for you? If the person is providing a product, when will they deliver it and how? Independent Contractor Status This very important part of the agreement clearly defines the worker as an independent contractor, not an employee. It lists the rights of the contractor to perform services for others unless they directly conflict with or compete with the work for your company. It should state whether the work must be done by the independent contractor or whether they can hire others to do some or all of the work. This section also states the specifics of any training to be received by the contractor. An independent contractor is usually a professional, however, so training is typically minimal and limited to describing the specifics of the work to be done for this particular company. How the Independent Contractor is Paid This section typically clarifies that the payments made to the independent contractor do not include withholding for income tax or payroll taxes (including FICA taxes for Social Security and Medicare). No federal or state income tax is withheld from payments to the contractor unless it's required by backup withholding requirements. No FICA taxes are withheld from the contractor's compensation and they're not set aside by company on behalf of the contractor. No federal unemployment compensation payments or workers compensation fund payments are paid by the company on behalf of a contractor. and this person can't get unemployment or workers comp benefits. Some states may require unemployment compensation or workers compensation for ICs; check with your state's employment agency for details. The contractor pays income taxes, sales taxes, Social Security, and Medicare taxes as a self-employed individual. Some contracts require that the independent contractor provide proof of these payments. Who Pays Expenses The contract should state who pays which expenses. The contractor is usually responsible for all expenses including mileage, vehicle maintenance, and other business travel costs; work supplies and tools; licenses, fees, and permits; phone and internet expenses; and payments to employees or subcontractors. Eligibility for Benefits The contract should include a statement clarifying that the contractor understands that they are not eligible for or entitled to pension or retirement benefits, health insurance, vacation pay, sick pay, holiday pay, or other fringe benefits typically provided by an employer. Insurance The contract language should clarify that the company will not provide liability insurance, auto liability insurance or other general insurance for the contractor. The contractor will not be covered by the company's liability insurance policy. This clause provides protection for you if some injury or loss is caused by the contractor. Depending on the type of services provided by the contractor, this section should clearly state that the contractor might be required to provide proof of general business liability insurance coverage. Some companies go even further and request a statement by the independent contractor that the company will be indemnified or held harmless in the event of injury or loss. Termination of the Contract Because this is a contract with an independent contractor, not an employee, the contract should state that either party can terminate the agreement with or without notice, depending on the circumstances. Taking the Contract to Court What happens if it all goes south despite all the care you've taken to ensure that you understand each other? Many business contracts include a mandatory arbitration clause requiring that contract disputes be settled by arbitration rather than litigation. Restrictive Covenants in IC Contracts Depending on the nature of the work, you might want to impose restrictive covenants on the independent contractor. The most common restrictive covenants are: A non-compete clause that restricts her from setting up a competing business within a certain time and in a certain area. A non-solicitation clause restricting the independent contractor from soliciting customers or employees of the hiring company can also be helpful. A non-disclosure clause/confidentiality agreement that restricts the contractor from disclosing company secrets or using secrets for their own gain. Note Which restrictive covenant you include in your contract with an independent contractor depends on your own situation. Some states have laws that don't allow restrictive covenants, so check with your attorney. Can You Prepare Your Own Independent Contractor Contract? You can find free templates for these contracts on the Internet, and you might be tempted to prepare your own, but every business situation is different. Note Using a free contract form may not be a good idea your business for several reasons. For example, most states have standard contract language that may not suit your specific business situation. Get help from an attorney to create your own independent contractor agreement to make sure it meets your specific business needs. You can always use that format to write contracts with other independent contractors going forward. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. IRS. "Independent Contractor Defined." Accessed Sept. 8, 2020. IRS. "Employee or Independent Contractor? Know the Rules." Accessed Sept. 9, 2020. U.C. Berkeley School of Law. "Sample independent Contractor Agreement (WORD)." Accessed Sept. 9, 2020. American Bar Association."Restrictive Covenants in Employment and Related Contracts: Key Considerations you Should Know." Accessed Sept. 9, 2020.