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 Arkansas, as in other states, the distinction between an independent contractor and an employee is significant for tax and legal responsibilities. Independent contractors, often referred to as freelancers, operate under a business-to-business relationship with those who hire them, meaning they are self-employed and not considered employees. Consequently, independent contractors are responsible for paying their own Social Security and Medicare taxes, known as self-employment taxes, and are not subject to tax withholding by the hiring party. The hiring entity is also not responsible for providing benefits or paying unemployment insurance or workers' compensation on behalf of an independent contractor. It is crucial for businesses to correctly classify workers, and the IRS provides guidelines for this, primarily through the right-to-control test, which assesses factors such as behavioral control, financial control, and the relationship between the parties. Misclassification can lead to legal and financial penalties. Arkansas may have specific statutes and regulations that further govern the classification of workers and the implications thereof, and it is advisable for businesses to consult with an attorney to ensure compliance with both federal and state laws.