Independent contractor status is a type of contractual and tax status that defines the working relationship between a provider and a client. This type of status is different from that of an employee who works full- or part-time for an employer in exchange for salary, wages, and some type of benefit packages. The actual definition of an independent contractor and the awarding of that status varies somewhat from one country to the next, although tax laws in most nations would include qualifications that clearly are outside the scope of an employee/employer arrangement.
One of the key characteristics of an independent contractor status is that the contractor is not identified as an employee of the client. Instead, the two parties enter into an agreement that defines the type of services that the contractor will provide, in exchange for some type of compensation. The contract may be open-ended, meaning that the relationship will continue for as long as both parties choose to do business. At other times, the contract may include a specific end date, with options to renew provided both parties are open to doing so.
Typically, independent contractor status is reserved for people who are considered by tax agencies to be self-employed. This distinction from full- and part-time employees is very important, especially in countries that utilize different tables to calculate self-employment taxes. Tax agencies will set the exact criteria that must be met to qualify for this status, and the contractor is considered responsible for properly calculating tax deductions and reporting income directly to the appropriate agency. This is in contrast to an employee status, in which the employer is responsible for reporting wages, salary, and commissions to tax agencies, along with arranging the withholding and forwarding tax payments on behalf of the employee.
In effect, independent contractor status provides recognition that the individual is not an employee of any company or organization, but rather provides services to different entities in exchange for compensation agreed upon between the two parties involved. An independent contractor will often make use of his or her own equipment and materials in order to fulfill obligations to a client, is responsible for managing the tax withholding and reporting, and in effect functions as a separate entity or business. In addition, someone with independent contractor status is free to work with several clients at any given time, provided there is no conflict of interest between any of the current roster of clients.
