Independent contractors are paid on a project basis or on an hourly basis. Occasionally, the contractor will be paid on a volume basis. In other words, he is paid by the number of products assembled, incoming calls handled or bills processed. An independent contractor can also get paid royalties or commissions.
Royalties are the payment for the use of intellectual property. A publisher contracts with an author, as an independent contractor, to publish the author's book. The author retains ownership of the book, but the publisher has the exclusive rights to publish that book. The contract will specify what the publisher can change in the book. The payment for those rights of publication are the royalties. Software, graphics, photographs, artwork, music and film are other products for which the owner gets paid royalties.
Work for Hire
If the contractor transfers ownership of the intellectual property itself, rather than just the rights, the payment to the independent contractor is not a royalty. It's payment for work for hire. Once that payment is made, the company can change, edit, delete and materially change the content as it sees fit.
Commissions are payment for the sale of a product. The payment is usually based on a percentage of the retail price. The independent contractor does not own the product, or necessarily take possession of the product, but is only responsible, and paid for, the sale of the product. The product may be digital, such as commissions on e-books through an affiliate program or for tangible products.
Distributors represent products from several companies that aren't large enough to afford their own sales representatives to the retail store's buyers. The payments to an independent contractor distributor may be made for these sales activities on a retainer basis; you pay a certain agreed-upon amount every month -- a commission basis -- and the distributor gets paid only on the sales made, or a combination of both.
The company that has retained the services of an independent contractor is not the employer of that an independent contractor, so is not liable for withholding taxes, paying Social Security or unemployment taxes. That's the responsibility of the independent contractor. However, the company is responsible for keeping track of all the monies paid to the contractor, whether it's royalties, commissions, for hours worked or projects completed. The amount must be reported on the appropriate form to the Internal Revenue Service. Where some companies go wrong is when they try to avoid paying their share of Social Security by categorizing an employee as an independent contractor.