To be a contractor means you run your own business and sell services to clients under a contract, instead of working as part of a company’s staff. That single difference reshapes almost everything around the work: you set how the job gets done, you carry your own taxes and insurance, you own what you create by default, and the relationship ends when the contract does. What you gain is independence. What you take on is everything an employer would normally handle for an employee.
The label on the paperwork does not settle the question. Two federal agencies apply their own tests to decide whether someone is truly a contractor, and a company that gets it wrong can be pushed to pay back wages, back taxes, and penalties.
Who Actually Counts as a Contractor
The IRS looks at three things: behavioral control (does the company direct what you do and how you do it), financial control (who pays for tools, how you’re paid, whether expenses are reimbursed), and the relationship itself (written contract, benefits, whether the work is central to the business).1Internal Revenue Service. Worker Classification 101: Employee or Independent Contractor No single factor decides. If a company controls enough of the picture, the worker is an employee no matter what the contract calls them.
The Department of Labor uses a different lens under the Fair Labor Standards Act. It asks whether you are economically dependent on the company or genuinely in business for yourself, weighing six factors: your opportunity for profit or loss, the investments you and the company make, how permanent the relationship is, how much control the company exercises, whether your work is central to the business, and your skill and initiative.2U.S. Department of Labor. Fact Sheet 13: Employee or Independent Contractor Classification Under the Fair Labor Standards Act All six are weighed together.
In practice, the signs that you are a contractor rather than an employee cluster around control and risk. You decide when, where, and how to do the work. You can take on multiple clients at once. You supply your own equipment. You can hire helpers or subcontract parts of the job. You can lose money on a project if costs outrun your fee, and you carry unreimbursed expenses like insurance, licenses, and marketing.1Internal Revenue Service. Worker Classification 101: Employee or Independent Contractor The more of that describes your setup, the stronger the case for independent status.
How You Get Paid and Taxed
Clients don’t withhold anything from what they pay you. Any client who pays you $600 or more in a year reports that amount to the IRS on Form 1099-NEC.3Internal Revenue Service. Am I Required to File a Form 1099 or Other Information Return? You report your gross income and subtract business expenses on Schedule C, and the profit flows to your personal return.4Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)
On top of income tax, you owe self-employment tax to fund Social Security and Medicare. The combined rate is 15.3%: 12.4% for Social Security and 2.9% for Medicare.4Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)5Social Security Administration. What Are FICA and SECA Taxes?6Internal Revenue Service. Topic No. 554, Self-Employment Tax7Social Security Administration. Contribution and Benefit Base You can deduct half of your self-employment tax as an adjustment to income when you file, which reduces your income tax but not the self-employment tax itself.
Because nothing is withheld from your checks, you generally need to send the IRS estimated tax payments four times a year if you expect to owe $1,000 or more when you file.8Internal Revenue Service. Estimated Taxes The due dates are:
- April 15, for income earned January through March
- June 15, for income earned April through May
- September 15, for income earned June through August
- January 15 of the following year, for income earned September through December
Missing an estimated payment can trigger an underpayment penalty even if you end up owed a refund.9Internal Revenue Service. Estimated Tax Separately, if you file but don’t pay the full balance, the IRS charges 0.5% of the unpaid amount for each month it sits, up to 25%.10Internal Revenue Service. Failure to Pay Penalty
What You Can Deduct
Running your own business opens up write-offs that reduce your taxable income. The main ones contractors rely on:
- Qualified business income. Under Section 199A, most contractors can deduct up to 20% of their net business income before calculating income tax. The deduction begins to phase out at $200,000 of taxable income for single filers and $400,000 for married couples filing jointly in 2026.11Office of the Law Revision Counsel. 26 USC 199A: Qualified Business Income
- Home office. If part of your home is used exclusively and regularly as your principal place of business, you can deduct rent or mortgage interest, utilities, and insurance in proportion to the square footage. The space cannot double as a guest room or family area.12Internal Revenue Service. Publication 587, Business Use of Your Home
- Vehicle. You can deduct actual costs (gas, insurance, repairs, depreciation) or use the standard mileage rate of 72.5 cents per mile for 2026. Commuting from home to a regular work location doesn’t count; travel between client sites does.13Internal Revenue Service. 2026 Standard Mileage Rates
- Health insurance. If you have a net profit and aren’t eligible for an employer-sponsored plan (including through a spouse), you can deduct premiums for medical, dental, and vision coverage for yourself, your spouse, and your dependents as an adjustment to income, so you benefit even with the standard deduction.14Internal Revenue Service. Instructions for Form 7206
- Equipment and supplies. Ordinary purchases like computers, software, and office supplies are deductible in the year you buy them.
What You Give Up, and What You Take On
The tradeoff for independence is that you replace, at your own expense, everything an employer would normally provide.
There are no fringe benefits. No paid time off, no health insurance, no retirement matching. If you want retirement savings with tax advantages, you set up your own account. A Solo 401(k) lets a self-employed person with no employees other than a spouse defer up to $24,500 of earnings in 2026 as the “employee,” plus up to 25% of net self-employment income as the “employer,” with additional catch-up amounts starting at age 50. A SEP IRA allows up to 25% of net self-employment income, capped at $72,000 for 2026, with all contributions coming from the employer side. A traditional or Roth IRA can be opened alongside either, with a $7,500 annual limit for 2026.15Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500
You also carry your own insurance. General liability covers bodily injury or property damage that happens during your work — for instance, damaging a client’s equipment. Professional liability, sometimes called errors and omissions, covers claims that your work was negligent or caused financial harm. Many clients require proof of coverage before signing. Workers’ compensation is generally not required for sole proprietors with no employees, though rules vary by state and industry.
And you carry personal liability for the business itself unless you form an entity. A sole proprietor’s home, savings, and vehicle are exposed if the business is sued or can’t pay its debts. A single-member LLC creates a legal barrier between personal and business assets while still being taxed the same way as a sole proprietorship by default.16U.S. Small Business Administration. Choose a Business Structure
The Contract Is the Relationship
An employee relationship is open-ended. A contractor relationship is defined by a written agreement that spells out scope, deliverables, deadlines, and payment. When the project ends, the relationship ends unless a new agreement is signed.
One default catches people off guard. Under copyright law, work produced by a contractor is not automatically owned by the client. For the client to own the copyright from the start, the work has to fit one of nine narrow categories defined by law and both parties have to sign a written agreement stating it is a “work made for hire.” Without that, the contractor owns the copyright.17U.S. Copyright Office. Circular 30: Works Made for Hire Employment works the opposite way: anything an employee creates within the scope of their job belongs to the employer automatically. If your contract is silent on intellectual property, read it carefully before you deliver.
Termination cuts both ways. Employees in most states can be let go at any time for nearly any lawful reason. Contractors are protected, and constrained, by the contract’s terms. A client who cancels early outside what the contract allows may be on the hook for breach; a contractor who walks away outside those terms may be too. Notice periods, payment for work already completed, and grounds for early cancellation are worth pinning down before the work starts.