Independent contractor vs. self-employed: the most important differences

If you don’t understand the difference, you could make a costly mistake. Misclassifying someone can lead to IRS penalties, unpaid taxes, or even lawsuits.

This article will help you:

• Understand how the IRS defines both terms
• Learn the legal and tax differences
• Know how to work with each type of worker safely

Definitions: independent contractor vs. self-employed

Let’s start with clear definitions. According to the IRS, an independent contractor is someone who offers services to another business but works independently. You don’t control how they do the work – only the final result. They often work on a contractual basis and send invoices for their services.

A self-employed person is anyone who runs their own business. That includes independent contractors but also small business owners, freelancers, and gig workers. They manage their own schedule, pay their own taxes, and take on business risks.

In short:

• All independent contractors are self-employed.
• However, not all self-employed people are independent contractors.

Examples:

• A freelance copywriter with multiple clients = independent contractor.
• A person running their own coffee shop = self-employed but not an independent contractor.

Both aren’t employees. They are responsible for their own income taxes, insurance, and business expenses.

Key differences between independent contractors and self-employed people

The terms may overlap, but there are key differences in how these two work. Here’s a quick breakdown:

Note: Some professions, like graphic designers, photographers, and business consultants, can fall into either category depending on how they work. If they provide services to businesses on a contract basis, they are independent contractors. If they build their own business or brand or sell directly to customers, they are self-employed people.

A quick note on worker classification

This article compares independent contractors and self-employed people. But don’t forget – employees are a separate category with very different rules. The employee-employer relationship comes with specific tax and labor obligations that don’t apply to contractors.

If you’re unsure how to classify someone, check the IRS guidelines on worker classification or read our complete guide on independent contractors. Getting it wrong can lead to serious tax and legal issues.

Tax & legal implications

Both independent contractors and self-employed people handle their own taxes. That means you, as the client, don’t need to:

• Withhold income tax.
• Pay employment tax (like Social Security or Medicare taxes).
• Offer health insurance, retirement plans, or paid time off.

But you still have responsibilities.

If you’re working with a U.S.-based independent contractor:

• Collect a W-9 form from the contractor.
• If you pay them $600 or more in a year, file Form 1099-NEC with the IRS.
• Keep records of what you paid and when.

If you’re hiring someone outside the U.S.:

• Ask for Form W-8BEN – this form is used by non-U.S. individuals to certify their foreign status and claim tax treaty benefits (if applicable).
• Some cases may require Form 1042-S – if you make certain types of payments (e.g., royalties, interest, or services performed in the U.S.), you may need to report them on Form 1042-S.
• Be aware of withholding tax rules – the IRS requires U.S. businesses to withhold tax on certain payments to foreign individuals unless a tax treaty applies. The standard withholding rate is 30%, but this can vary based on treaty agreements.

Insurance and licenses

Many self-employed workers are required to hold:

• General liability insurance – protects against property damage or injury.
• Professional liability insurance – covers mistakes in services.
• Commercial auto insurance – if they drive as part of their work.
• Some may also need a business license, depending on their state or industry.

Important: You don’t need to provide these – but it’s smart to check if your contractor has them. It protects your business too.

How to pay self-employed professionals

Paying self-employed individuals is usually straightforward, but you still need to follow some basic rules.

1. Agree on payment terms – discuss rates, deadlines, and payment structure before the work starts. Self-employed professionals often charge:

• Per hour.
• Per project.
• Per milestone or deliverable.
• On a monthly retainer.

2. Use a clear payment method – choose a method that works for both sides:

• Bank transfer.
• Online platforms (like PayPal, Wise).
• ACH or wire transfer for U.S.-based contractors.

If you’re working with someone abroad, ask about currency and transfer preferences early.

3. Request an invoice or payment request – self-employed people usually issue their own invoices. If they don’t have a registered business, you can work through platforms like Useme. Useme lets you find new specialists, but also simplifies payments to your current freelancers. It takes care of the contract, legal aspects, and provides you with an invoice. 

4. Keep records – always track payments, dates, and amounts. This helps with your bookkeeping and protects you during audits.

💡 Tip: Useme lets you legally and securely pay self-employed professionals, even if they don’t run a formal business.

Examples

Still not sure how independent contractors and self-employed people differ in practice? Here are a few simple examples:

Independent contractor

A freelance graphic designer who works with 3 different agencies. She signs short-term contracts, sets her own hours, and sends invoices per each photoshoot. She’s responsible for her own tools, software, and taxes. She’s an independent contractor – and also self-employed. She is self-employed but operates under agreements with other companies, making her an independent contractor.

Self-employed business owner

A wedding photographer who runs her own small studio. She advertises, finds her own clients, books them directly, and hires an assistant during busy seasons.  This is a more entrepreneurial role rather than working as an independent contractor for another company. She files business taxes, reports her personal income, and pays for business liability insurance. She’s self-employed, but not an independent contractor working for another company.  

Gig worker

A driver who works for Uber and food delivery apps. He sets his schedule but follows platform rules. He doesn’t have direct contracts with clients. He’s self-employed too, but in a different way than contractors or freelancers.

These roles all fall under self-employment, but the way they work – and how you collaborate with them – can be very different. As a business owner, it’s important to understand the needs, risks, and responsibilities when working with self-employed individuals.

Benefits and challenges of working with independent contractors and self-employed people

Hiring independent contractors and self-employed individuals can be a smart move – but it comes with trade-offs.

Key benefits:

• Flexibility – you can scale your team up or down depending on project needs.
• Specialized skills – these workers often bring deep expertise in areas like design, software, content, or consulting.
• Cost-efficiency – you don’t pay employment taxes or benefits.
• Speed – onboarding is faster. They’re often ready to start immediately.

Common challenges:

• Less control – You can’t manage how the work is done, only the result.
• Limited availability – Some work with multiple clients, so you’re not always their top priority.
• No long-term commitment – They can leave after the project ends.
• Legal complexity – If you misclassify them, you risk legal trouble.

That’s why it’s important to set expectations early and treat them as true business partners – not as employees in disguise.

Why you need to know the difference

Knowing the difference between independent contractors and other self-employed individuals isn’t just about definitions. It affects how you:

• Set up contracts.
• Handle payments.
• Manage tax forms, including income tax withholding, when required.
• Protect your business.

Misunderstanding these roles can lead to:

• Delayed payments or legal disputes.
• Wrong tax filings and penalties.
• Missed insurance coverage.
• Damage to your reputation as a client.

If you work with multiple freelancers, consultants, or other contractors, clear classification helps you stay organized, compliant, and aligned with each worker’s correct employment status – especially as your business grows. It also shows professionals that you respect their work and time.

Best practices for working with contractors and self-employed professionals

To get the best results and avoid problems, follow these best practices:

1. Use clear written agreements – always define:
   • Scope of work.
   • Timeline and deadlines.
   • Payment terms.
   • Who owns the work (IP rights).

Even if the project is small, having a contract protects both sides.

1. Communicate early and often – freelancers and contractors work independently, so good communication matters. Set expectations upfront. Share feedback. Be clear about priorities.
2. Respect their independence – don’t micromanage. You’re not their boss – you’re their client. Focus on the outcome, not the process.
3. Centralize your contractor management – use one tool or platform to keep contracts, files, and payments in one place. It saves time, helps with compliance, and avoids misunderstandings.

💡 Tip: Useme provides all of this in one place, including contracts, payments, and deadlines.

How Useme helps

Useme makes it easy to work with freelancers and self-employed individuals – even if they don’t run a registered business. You don’t need to worry about contracts, international payments, or paperwork. We take care of that.

With Useme, you get:

• Legal and secure cooperation – we sign a contract with the freelancer on your behalf and resell their work to you. In consequence, you get an invoice from Useme – a trusted EU company – clear, compliant, and in English.
• No admin burden – we handle the formalities: contract signing, data collection, and freelancer support. You don’t need to chase anyone.
• Fast international payments – make a single payment – we take care of currency exchange and transfers.
• Works for all self-employed professionals – designers, developers, consultants, writers – anyone working on a contract basis can use Useme to collaborate with you legally.
• All-in-one platform – keep all your files, invoices, and contracts in one place. Track deadlines and payments easily.

Useme is ideal if you work with multiple freelancers or self-employed contractors across borders. We help you stay organized, compliant, and focused on results – not paperwork.

Conclusion

Independent contractors and self-employed individuals may seem similar – but they’re different. Understanding the difference helps you:

• Choose the right type of worker.
• Avoid tax and legal issues.
• Build better, clearer work relationships.

If you’re hiring freelancers or self-employed professionals from other countries, Useme offers a fast, legal, and stress-free process. One contract, one invoice, one secure payment – no red tape.

→ Start working with freelancers the easy way – check out Useme!