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 Vermont, as in other states, the distinction between an independent contractor and an employee is significant for tax and legal purposes. Independent contractors, often referred to as freelancers, are considered self-employed and are responsible for paying their own Social Security and Medicare taxes, known as self-employment taxes. Unlike employees, no taxes are withheld from their payments by those who hire them. Vermont adheres to the federal guidelines provided by the IRS, which include the right-to-control test to determine a worker's status. This test examines factors such as the degree of control the hiring entity has over the worker, the worker's investment in equipment, the opportunity for profit or loss, and the permanency of the relationship. Proper classification is crucial as misclassification can lead to legal and financial penalties. Employers in Vermont must ensure they classify workers correctly to comply with both federal and state tax laws.