What is an independent contractor? Definition and examples

Hiring across borders has never been easier—or riskier. For global employers, understanding the legal and tax distinctions between independent contractors and employees isn't just semantics. It's about compliance, cost, and avoiding penalties.

In this guide, we’ll explain what defines a contractor versus an employee, why misclassification matters, and how to hire independent contractors the right way—especially when working across borders.

What is an independent contractor?

An independent contractor is a self-employed individual who provides services under a contract or project-based agreement. They manage their own taxes and insurance, and they generally don’t receive employment protections or benefits unless outlined in a written agreement. Unlike employees, independent contractors typically set their own schedules and use their own tools and supplies to complete their work. 

In the United States, most independent contractors operate as sole proprietors, freelancers, or single-member LLCs. From a legal and tax perspective, independent contractors aren’t employed by the businesses that hire them. This means they aren’t entitled to minimum wage, overtime pay, or traditional employee benefits like paid time off or health insurance, unless those terms are included in the independent contractor agreement. Hiring companies generally don’t withhold income tax or make Medicare or Social Security contributions for contractors.

Independent contractors vs. employees

Whether someone counts as an independent contractor or employee depends on the specifics of the working relationship, and the distinction carries major legal and tax consequences.

Employers must evaluate factors like financial control, who provides the tools and equipment, and how integrated the worker is into the business. Employees are typically subject to more oversight: Employers decide when and how they work, provide the necessary resources, and offer a steady wage or salary along with employee benefits like paid leave, health insurance, and labor law protections.

There’s also a key tax difference. Employers must withhold federal and state income taxes and contribute to Social Security and Medicare taxes for employees. Independent contractors, on the other hand, handle their own tax obligations. In the U.S., the IRS requires self-employed individuals to pay self-employment tax—15.3% in 2025—to cover Social Security and Medicare. Contractors are also responsible for calculating and paying estimated taxes quarterly.

Classification and misclassification of independent contractors

Correctly classifying workers is one of the most important legal responsibilities for global employers. Misclassification—treating someone as an independent contractor when they meet the criteria of an employee—can lead to serious financial, legal, and reputational consequences. And it can even occur even when both parties agree to an independent contractor arrangement. 

Government agencies, such as the IRS in the U.S. and labor authorities worldwide, use key factors to determine classification:

• Behavioral control: If the company directs how, when, and where the contractor's work is done, the individual is likely misclassified and should be treated as an employee. Independent contractors typically control how their work is carried out.
• Financial control: If the worker sets their own rates, provides their own tools, and invoices for payment, they’re likely an independent contractor. Employees are generally paid through payroll and don’t handle their own billing.
• Nature of the relationship: Ongoing arrangements that include benefits or obligations typical of an employer-employee relationship suggest an employee. Independent contractors usually perform project-based work with fewer long-term commitments.

Consequences of misclassification

Improper classification can have serious consequences. Employers may face penalties and interest for unpaid taxes or social contributions, along with liability for back pay, overtime, or employee benefits. It can also lead to audits, legal disputes, or lawsuits and damage your reputation with current and future contractors.

For global companies, the risks grow. Worker classification laws vary by country, and mistakes can trigger compliance issues across jurisdictions. That’s why it helps to work with a partner like Oyster, who can guide you through the rules in every market where you operate.

Pros and cons of hiring independent contractors

Hiring independent contractors can be a smart choice when you need specialized skills, short-term support, or want to avoid the cost of a full employee compensation package. But like any employment decision, it comes with trade-offs.

Here’s a closer look at the potential advantages and drawbacks:

Pros of independent contractors

• Cost savings: Because independent contractors are self-employed, employers aren’t responsible for payroll taxes, unemployment taxes, or benefits like health insurance and paid time off. Compared to a full employee compensation package, total costs are often significantly lower.
• Flexibility: You can hire independent contractors on a project-by-project or hourly basis, making it easier to scale your workforce as business needs evolve.
• Specialized expertise: Independent contractors often bring niche skills that you don’t need in-house long-term but are valuable for specific projects or short-term initiatives.

Cons of independent contractors

• Less control: You can define deliverables and timelines, but you can't decide how or when they perform their work.
• Misclassification risk: Treating someone like an employee while classifying them as a contractor can lead to fines, back pay, and tax penalties, especially in countries with strict labor laws.
• Lower commitment: Independent contractors aren’t always available long-term. They often work with multiple clients and may not prioritize your business the way employees would.

How to hire an independent contractor

Hiring an independent contractor isn’t the same as bringing on a full-time employee. It can reduce costs and increase agility, but it also puts the responsibility on the employer to define the terms clearly and stay compliant—especially across borders.

Here’s how to hire an independent contractor the right way:

1. Define the scope and expectations

Be clear about what the contractor is being hired to do. Outline deliverables, deadlines, communication preferences, and the desired outcome. A well-defined scope keeps the work on track and helps prevent confusion later.

2. Vet candidates and check references

Just like with employees, skill and cultural fit matter. Review portfolios or work samples, check references, and make sure the self-employed contractor has experience relevant to the project—especially if collaboration or fast turnarounds are involved.

3. Create a written contract

Use a formal independent contractor agreement that spells out the project scope, milestones, payment terms, ownership of work, and any noncompete or termination clauses. A written contract protects both sides and helps avoid disputes.

4. Stay compliant with tax and labor laws

Classification and tax requirements vary by country. When hiring independent contractors, treat them as self-employed professionals, and avoid offering employee-style benefits, setting fixed schedules, or closely supervising their work. Research local labor laws and tax obligations to ensure that the contractor arrangement is fully compliant.

5. Provide the right tax documentation

In most countries, companies must report payments made to freelancers and contractors. In the U.S., the IRS requires businesses to issue Form 1099-NEC for any non-employee who earns $600 or more in a year. Keep accurate records from day one to avoid issues at tax time.

6. Maintain communication and evaluate project outcomes

Even if contractors work independently, regular check-ins matter. Set up touchpoints to monitor progress and address concerns. Once the project wraps, review the outcome and consider whether to re-engage the contractor in the future.

Simplify independent contractor management with Oyster

Hiring independent contractors across borders gives you access to global talent, but doing it right is easier said than done. Vague contracts, misclassification, or noncompliance with local labor laws can lead to audits, fines, and reputational risk.

Oyster helps you manage international independent contractors, keeping the terms clear and the process compliant. From worker classification and contracts to secure international payments and jurisdiction-specific guidance, the platform handles every step.

Whether working with a freelance designer, software engineer, or consultant in another country, Oyster supports contractor compliance—including local rules around employment status, paid time off, unemployment taxes, and labor protections.

Hire contractors globally with confidence. Book a demo to get started.