An independent contractor (also known as a freelancer) is a person or entity who agrees to work for another person or entity as a nonemployee. Because of the independent contractor’s status as a nonemployee, the contractor must pay their own Social Security and Medicare (FICA) taxes. And the person or entity hiring the independent contractor has no obligation to withhold income taxes from the contractor’s fees. It is important for the person or entity who hires a worker to properly classify the worker as an employee or as an independent contractor based on the IRS’s right-to-control test.

In Alabama, as in other states, the classification of a worker as an independent contractor or an employee is significant for tax purposes and compliance with labor laws. Independent contractors in Alabama are responsible for paying their own Social Security and Medicare taxes, as they are not employees and therefore do not have taxes withheld by the hiring party. The hiring entity is also not required to provide benefits such as workers' compensation, unemployment insurance, or adhere to minimum wage and overtime regulations for independent contractors. The classification is guided by the IRS's right-to-control test, which examines factors such as the degree of control the hiring party has over the worker, the financial arrangements, the relationship between the parties, and the nature of the work being performed. It is crucial for businesses to correctly determine the status of the workers to avoid penalties and legal issues that can arise from misclassification.