Working as independent contractors has become a global trend recently. They also gradually proved their power by contributing 1.3 trillion to the US economy in 2021. In Vietnam, freelancers account for 14% of intellectual human resources. Independent contractors have the freedom to design a job that fits their needs and preferences. They also can pick what they want to work on, who they want to work with, and where they want to work from. It sounds amazing. So what is an independent contractor? You will find the answer in this article.
What Is An Independent Contractor?
An independent contractor is a self-employed individual or company contracted on a non-employee basis to provide services to another company. In other words, an independent contractor can be a company or personal contractor.
Both parties sign a contract outlining the contractor’s responsibilities, compensation, the nature and scope of the task, and other details. The agreement focuses more on the work than on the worker’s method of execution.
Many companies currently use payroll services to pay salaries to independent contractors for more convenient purposes
How Do Independent Contractors And Employees Differ?
Independent contractors and employees are two distinct terms. They have many different features as below:
|Type of work||Perform service per specific project||Perform essential tasks in the company normal operations|
|Degree of Control||-Self-employed |
-Contractors have the right to decide how to perform the task
|The employer has the right to control how and when services are performed.|
|Tax||-Self-employment taxes |
-Excise tax( company contractor)
|-Social Security Tax|
|Payment||Get paid per project||Get paid every week or month|
|Obligation||Work on a temporary basis have the flexibility to set their hours and schedule||Work full-time on a regular basis|
|Working tools||Contractors supply their work tools||-The employer provides training and supervision|
-The employer also provide all needed tools for works
|Termination||Independent workers are not permitted to terminate services without incurring liabilities, except as permitted by their contracts||Employees can leave a company without incurring any liability.|
Advantages and Disadvantages of Independent Contracting
Independent contracting can bring many benefits to the hiring company.
In contrast, it also raises many disadvantages.
Lower overhead cost
While the hourly rates of independent workers are frequently far higher than those of employees, these contractors are nonetheless accountable for their overhead costs, which include equipment, supplies, and workspace. Training, benefits, paid time off, unemployment insurance, and workers’ compensation are not your responsibility. The contractor is responsible for covering their taxes. Additionally, they give you an invoice so you may pay them directly without going through the payroll office.
An independent contractor is typically a specialist in their field with a specialized skill set, such as writing, design, or IT. The contractor can usually get started right away, so you don’t have to spend money on staff training. This is particularly helpful for short-term initiatives because expensive internal hiring and training may not be able to meet long-term needs and would cost more than the training’s long-term benefits.
If the independent contractor is a good fit, you can choose to offer them another project after your current contract expires, or you can decide not to make any more offers. If the contractor’s performance impresses you, you can give them other assignments on a timeline that works for your company. The process of dissolving a working partnership is much more complicated.
Independent contractors frequently work on several projects from various businesses at once, so they might not be accessible exactly when you need them. Additionally, even if you like their work, a contractor may determine that you are not a good fit. A contractor is also unlikely to feel the same level of commitment to your company as an employee does because they often work off-site.
Any job a contractor completes for you might not be your legal property unless it’s stated otherwise in your contract. To reflect any legal claims to the creative product, review copyright rules and arrange your contracts accordingly.
Potential legal liabilities
You may be subject to an audit if the authority believes that the work performed by a contractor should be classified as “employee” activity. Additionally, there is a chance of a liability lawsuit if a contractor is hurt while performing contract-related responsibilities since you are not providing workers’ compensation coverage to them.
Typical examples of independent contractors
There are many types of independent contractors. We can list 4 main examples as follow:
- Interior designer: Interior designers can work as independent contractors in home decorating for many customers. They would decide on project details, including hours, salary, and ideas, with whom they have a contract to work.
- Freelance writers: Freelance writers are self-employed individuals who write articles and then sell them to publications. They use their working tools and set their working hours and schedule to finish the tasks as agreed in the contract. This is the most popular independent contractor type in Vietnam. A freelance writer can get around 10-30 mils VND per month.
- Real estate agents: Real estate brokers frequently operate independently. However, they usually work within a larger network or organization that facilitates commission processing in return for guiding a sale.
- IT professionals: Some IT experts work as independent contractors. They often undertake short-term or specific project work with a deadline and play the role of an independent contractor. In Vietnam, this is the job with highest salary that someone can receive when working as an independent contractor. You can earn around 20-100mil VND per month.
What is the difference between self-employed and independent contractors?
Self-employment is essentially the process of making money without engaging in an employee-employer relationship. An independent contractor meaning is a person who performs work or services on a contractual basis.
A third party typically hires independent workers to carry out specified tasks or projects that are outlined in a contract. Self-employment, in contrast, has a huge ability. They can own businesses, run startups, and even hire independent contractors.
Does an independent contractor count as income?
An independent contractor’s earnings are counted as income. They will have to pay income tax, social insurance, and medicare by themselves.
See more: How to pay independent contractors?
How can an independent contractor avoid paying taxes?
- Find all possible deductions, including what you pay for tools, the use of your vehicle for business purposes, conference and networking attendance, trade association dues, and advertising and marketing expenses.
- Look into tax-advantaged investments. These are any asset that permits you to postpone paying taxes for many years or whose capital and income are tax-free. The interest on investments in municipal bonds or municipal bond funds may also be free from state taxes.
- Think about your business structure. If you operate as a corporation, paying yourself a salary separates your income from business revenues. This way may allow you to avoid some self-employment taxes.
In general, after understanding what is an independent contractor, you may feel fantastic due to the huge profits and comfortability it brings. However, each work type has its advantages and drawbacks. It relies on your condition and ability to decide.
Ms. Tracy has worked in human resource consulting for over 15 years. A driven entrepreneur focused on business expansion and people development. She previously worked as Country Manager for an international Australia firm that specializes in global workforce management, as well as several key roles as Business Growth Director and Executive Search Director for both large local firms to effectively drive their business growth. A strong emphasis is placed on aligning organizational priorities/objectives with business needs. She has a large network of local business leaders and a thorough understanding of the local market.