# Independent contractor

> An independent contractor is a self-employed individual or business engaged to deliver a specific service or result, rather than employed under an organisation's direction, meaning the contractor handles their own tax and benefits and the engaging company withholds nothing on their behalf.

An independent contractor is in business on their own account. They agree to deliver a defined piece of work, set their own methods and hours, invoice the company that engages them, and settle their own tax. The engaging company withholds nothing and provides no statutory benefits such as paid leave.

The label alone does not decide the status. Tax and labour authorities look at the reality of the relationship: how much control the company exercises, whether the person can send a substitute, whether work is offered and accepted continuously, and whether the contractor bears genuine financial risk. If the pattern resembles employment, the person may in law be an employee.

Engaging contractors is legal and common in most markets, but misclassification carries real cost. High-scrutiny jurisdictions such as Brazil, France, Spain and the United Kingdom apply strict tests, and a wrong call can trigger back taxes, penalties and retrospective benefit claims.

## What makes someone an independent contractor rather than an employee?

Control is the pivot. A genuine contractor decides how and when the work is done, uses their own tools, can usually send a substitute, and stands to profit or lose on the job. An employee works under the company's direction, is integrated into the business, and depends on it for regular pay.

Different countries weigh these factors differently, but the direction of travel is the same: substance beats the wording of the contract.

## Who is responsible for a contractor's tax?

The contractor is. They register as self-employed, invoice for completed work, and pay their own income tax and social contributions. The engaging company withholds nothing, which is part of the appeal. That only holds, though, if the classification is correct; if it is not, the company can be pursued for the unpaid amounts.

In the United States, a contractor pays self-employment tax covering both halves of Social Security and Medicare.

## When does an EOR make more sense than a contractor?

When you want someone working closely with your team over the long term, or when local rules make contractor status hard to defend, employing them through an employer of record (EOR) removes the question. The EOR becomes the legal employer in that country and runs compliant payroll, tax and benefits, so no misclassification risk remains.

## Key facts

- **US self-employment tax rate:** 15.3% of net earnings (12.4% Social Security plus 2.9% Medicare) (Source: Internal Revenue Service, verified 2026-07-28)
  The 12.4% Social Security portion applies up to the annual wage base, set at $184,500 for 2026; the 2.9% Medicare portion has no upper limit. Contractors pay this in place of employer payroll withholding.
- **US classification standard:** The IRS applies a common-law control test across three categories: behavioural control, financial control and the type of relationship (Source: Internal Revenue Service, verified 2026-07-28)
  No single factor decides the outcome; the authorities weigh the whole relationship. A wrong call can trigger back taxes and penalties for the engaging business.

## Independent contractor vs employee obligations

|  | Independent contractor | Employee |
| --- | --- | --- |
| Who controls the work | The contractor sets methods and hours | The company directs the work |
| Who pays the tax | The contractor self-assesses and pays | The company withholds and remits |
| Statutory benefits | None from the engaging company | Paid leave, sick pay and more |
| Main risk to the business | Misclassification if the relationship looks like employment | Higher fixed employment cost |

## Frequently asked questions

### Can a contract on its own make someone an independent contractor?

No. Labelling a worker a contractor does not settle the matter. Tax and labour authorities look at how the relationship works in practice. If you control the work, the person cannot send a substitute, and they depend on you for regular pay, they are likely an employee whatever the paperwork says.

### What happens if I misclassify an employee as a contractor?

The engaging business usually carries the cost. Depending on the country, that can mean back income tax, unpaid employer social contributions, interest, penalties and retrospective claims for benefits such as holiday pay. The worker may also gain the right to claim employment protections.

### Do I need to withhold tax for an independent contractor?

Generally no. A genuine contractor invoices you and settles their own tax. In the United States you may still need to report payments on a Form 1099-NEC once they pass the annual threshold, but you do not withhold income tax or pay employer payroll taxes on their fees.

### How can I hire someone abroad without contractor risk?

If contractor status is hard to defend in a given country, an employer of record can employ the person for you on a compliant local contract. You keep day-to-day direction of their work, and the EOR takes on payroll, tax and statutory benefits, which removes the classification question.

## Sources

- [Self-Employment Tax (Social Security and Medicare Taxes)](https://www.irs.gov/businesses/small-businesses-self-employed/self-employment-tax-social-security-and-medicare-taxes), Internal Revenue Service
- [Independent contractor (self-employed) or employee?](https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee), Internal Revenue Service

_Last updated 2026-07-28. Reviewed by Teamed's in-house employment-law team. Source: https://www.teamed.global/glossary/independent-contractor_