Independent contractors and sole proprietors are two different classifications of independently employed individuals.
Both classifications represent an individual that accepts financial responsibility for their work and that does not utilize a more complex business entity such as an LLC. However, they represent two distinct classifications and present different tax and legal implications.
A few of the key differences between the two classifications are as follows:
Structure of the business
The key differentiating factor between IC’s and SP’s is that IC’s contract with companies as an individual while SP’s contract with companies through an individually owned business.
It’s important to remember that an SP can still contract with a company as an independent contractor and that keeping track of this differentiation is crucial to maintaining a fully compliant individual income tax report.
How the money is made
ICs frequently provide services to companies on a contract basis for a set fee. SPs may engage in providing services for customers, however, they can also have additional sources of income, such as their own proprietary products that they sell directly to end users.
For example: a computer programmer may serve as an independent contractor helping to build out the backend of an application a particular company is developing. However, the same programmer may also hold a patent on a particular piece of software that he or she licenses to various organizations through a sole proprietorship. Thus, the same individual may concurrently act in one capacity as an independent contractor and in another capacity as a sole proprietor.
Income tax implications
Regardless of whether an individual provides services as an independent contractor, a sole proprietor, or both, he or she is responsible for reporting their income and paying their taxes at the end of the tax year.
However, the major contrast between the two structures is that, in the United States, an IC receives Form 1099-NEC from their client, which documents their total income earned during the tax year. Meanwhile, SPs are expected to track their own business income and to calculate and file taxes on their own.
In the United States, both ICs and SPs will complete Schedule C (Form 1040) and submit it to the IRS during tax season to document their personal (IC) or business (SP) income during the previous financial year. As such, both classifications are required to pay their payroll taxes, such as taxes for Social Security, in one lump sum at the conclusion of the tax year.
Financial liability
The final primary difference between SPs and ICs is the level of financial liability they assume for their work.
While both ICs and SPs assume responsibility for their output, the risk is much greater for SPs as this liability extends to their personal funds (which are directly connected to their business assets).
It is in the best interest of SPs, ICs, and the organizations that contract with them to ensure that they have clear, ironclad contracts to determine the outcome if something goes awry.
About Borderless
Borderless is a global company of passionate people brought together by the conviction that hiring local talent anywhere in the world can be the greatest form of opportunity equalization.
Organizations that choose to look beyond their brick-and-mortar offices will not only have access to a wider talent pool of highly qualified individuals, but will also be supporting emerging local economies, improving their workforce diversity, and contributing to emission reduction by removing the daily commute. All while increasing their bottom line and reducing their legal liability.
Borderless enables you to become a distributed organization whose members will be empowered to lead the lifestyle they desire without sacrificing their career opportunities or feeling like 2nd class citizens.
Disclaimer
Borderless does not provide legal services or legal advice to anyone. This includes customers, contractors, employees, partners, and the general public. We are not lawyers or paralegals. Please read our full disclaimer here.
