A clear and legally binding independent contractor agreement:
Editor's note: This post was originally published September 4, 2017, and has been updated for accuracy, comprehensiveness and freshness on May 14, 2026.
Millions of U.S. workers are considered independent contractors, which means they work for themselves. They’re not employees of whoever hires them. Instead, they agree to do specific work on set terms.
In this guide, we’ll look at what to include in every independent contractor agreement. We’ll also explain why each term matters. Plus, you'll learn the essentials for a contract that supports a smooth, professional working relationship — no matter which side you're on.
Using a template can save time and provide a helpful starting point. That doesn’t mean all templates are safe to use. The right template includes all the necessary terms and allows you to customize it. For instance, you may be working with a foreign contractor. You’d need to include different information. The more specific details you include, the better the independent contractor agreement works.
An independent contractor agreement is a legally binding document, usually in writing, that defines the working relationship between two parties. It lists services, payment terms, and various conditions.
Contractors aren’t always called contractors. Some agreements use other words, but they all refer to contracts made with people who work for themselves. An independent contractor agreement could also be called a:
An independent contractor can be a business, an individual, or a group of people. Independent contractors perform work or provide services under an agreed set of terms, which usually include a scope, price, and term. The party that benefits from the work can be a business, a person, or a group of people, and is often referred to as a customer or client.
Unlike employees, independent contractors may maintain control over how they complete their work. They may set their own schedules. Contractors typically work with multiple clients.
The key differences between independent contractors and employees include:
Businesses often hire independent contractors for their specialized skills. The contract might be for a short-term gig or a long-term relationship. This saves them the overhead costs of full-time employees. Companies can scale their workforce based on project needs. Conversely, independent contractors enjoy the flexibility of choosing their clients and projects.
A written independent contractor agreement protects both parties. It clearly outlines responsibilities, scope of work, and payment terms. It should also include ways to handle disputes, cancellations, and contract changes. Your contract defines who is liable for what.
A well-written agreement also clearly states that the relationship between the parties is contractual, not employer/employee. Without this documentation, both contractors and hiring companies face unnecessary risks. Those risks could result in costly legal battles.
One of the biggest risks of skipping a formal agreement is worker misclassification. Your independent contractor agreement can provide legal protections when properly drafted. It clearly states whether the working relationship is between a client and contractor or an employer and employee.
If the IRS or Department of Labor determines that a worker should have been classified as an employee rather than a contractor, your business could face:
A written independent contractor agreement can help demonstrate the nature of the working relationship. It can be evidence if classification questions arise.
What is scope creep? It’s when additional work gets added without proper compensation. Clear project boundaries listed in your independent contractor agreement help prevent scope creep. Both parties understand exactly what's expected. This helps you avoid the frustration and financial disputes that unclear expectations can cause. Expanding the scope can be addressed in an independent contractor agreement by requiring that any changes to the scope be made in writing.
Your contractual agreement should clearly state that independent contractors are responsible for paying their own taxes. These taxes include federal and state withholding taxes, Social Security, and Medicaid. This protects both sides from potential tax problems.
Including that statement in your contractor agreement helps establish the nature of the working relationship. It reduces your liability for employment-related taxes if you are the one hiring the independent contractor.
Ready to draft an independent contractor agreement? Here’s a quick checklist of elements you’ll need to address:
You can also strengthen your independent contractor agreement by including terms like:
Document specific payment details to prevent misunderstandings:
Remember that independent contractors are responsible for paying their own federal and state income taxes. Clients don’t have employment tax obligations. This distinction is crucial for maintaining proper worker classification.
For international contractors, your agreement may need adjustments. Be sure to include currency specifications for payments. Address which party is responsible for exchange rate fluctuations and conversion fees.
Approved payment methods for international transfers may be bank wires, digital wallets, and credit or debit cards. If payment methods have fees, say who is responsible for paying them.
Legal disputes and taxes are more complicated across borders. State the legal jurisdiction for dispute resolution. Also address the tax implications for cross-border payments.
Your contractual agreement should use plain, straightforward language that both parties can easily understand. That eliminates confusion and reduces the chance of misunderstandings.
Let’s go over a short list of steps you need to take:
Now, we’ll discuss a few more important elements of your independent contractor agreement.
It’s great that you’ve decided to create a contractor agreement. Like most things, there are mistakes you could make when writing a contract. Understanding common errors can help you avoid them:
You may worry that you’ll make these or other mistakes. For peace of mind, ask your LegalShield provider law firm to review your contractor agreements.
While templates can be a helpful starting point, they may not fully address your specific situation or state requirements. With LegalShield® member plans, you can protect yourself by having your agreement reviewed by a qualified provider lawyer, who can also advise on contract disputes or answer questions about starting a small business.
Get access to legal research and advice from a provider law firm for a low monthly fee with a LegalShield Business plan. All without the high hourly costs of hiring a lawyer out-of-pocket!
The level of independence and control is a major difference. Contractors are their own boss and agree to work for a client. Employees take direction from employers about how, when, and where to perform their job duties.
Using a template to write your own agreement saves time and templates can include common provisions, but they may not address your specific legal needs. Having a lawyer review it can help prevent loopholes and give you peace of mind.
If there are changes in laws, compensation, project scope, or tax regulations, you need to review your agreements. Update if needed. Otherwise, review them at least once a year. Clarify terms and make any adjustments.
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