Contract Employee Rules

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Contract employees or independent contractors work on projects under a contract for a predetermined amount of time according to their own schedule. They are not the same as regular full-time employees because full-time employees are hired to work under close supervision and receive special benefits such as health insurance. According to the Internal Revenue Service, these two work classifications are treated differently for the purpose of collecting taxes.

1099 Forms

Contractors must file a 1099 form with each of their clients. This form is for anyone who is self-employed and it is necessary when the contractor earns at least $600 from a client. The form reports the contractor’s earnings for each client. According to the Internal Revenue Service, contractors are responsible for paying taxes on their profits, not the clients that hired them.

Self-Directed Work

Contractors must have control over how their work is completed and the financial aspects of the work. This means that someone who is being told exactly how work should be done and is supervised is not an independent contractor. FedEx and UPS are delivery companies that operate almost the same way, but FedEx classifies drivers as contractors while UPS drivers are employees. According to Braun Consulting News, FedEx has been sued over questions concerning its employee classification. You can prevent similar problems by reviewing the IRS requirements for contractors before creating job descriptions. Contractors have financial responsibility over reporting earnings and business expenses like software and tools. This is why contractors charge more per hour than a full-time employee in a similar role: they are functioning and spending money like a company that has one employee.


Contracts are strong proof that someone is a contractor rather than a full-time employee. The contract can't state exactly how work should be done but can specify details such as the expected results, deadlines and payment methods. Ideally, the contract should state that the contractor is independent and not a full-time employee. Clear contracts can save both parties from legal difficulties. According to Inc Magazine, the IRS believes 15 percent of all workers are misclassified. Microsoft lost a court case over the classification of independent contractors because they treated temporary independent contractors exactly like regular, full-time employees. Since the contractors were told to work on-site under supervision and work at regular times, the company had to pay penalties for misclassification.