Definition
A self-employed worker who controls how a job is done and is paid without tax withholding, unlike an employee.
What it means
Whether a worker is an independent contractor or an employee depends on the facts, not on what the contract says. The IRS looks at behavioral control (who decides how the work is done), financial control (who pays expenses, can the worker make a profit or loss, does the worker offer services to others) and the relationship (benefits, permanence, whether the work is a key part of the business). The Department of Labor uses its own test for minimum wage and overtime rules, and states may use stricter tests. Contractors pay their own self-employment tax and estimated taxes and receive Form 1099-NEC instead of a W-2. Misclassifying employees can lead to back taxes and penalties. Either party can ask the IRS for a determination with Form SS-8.
Example
Paying a worker $40,000 as a contractor saves the business $3,060 in employer FICA tax, but if the worker is really an employee, the business can owe those taxes plus penalties.
Illustrative numbers only. Your situation will differ.