The striking similarity between an independent contractor and a business owner is the freedom that each has to make business decisions. The differences occur in the protections and legal requirements that a business owner must keep in place, which do not extend to an independent contractor. An independent contractor may have fewer legal requirements than a business owner, but he also has less protection from job loss or injury under the law.
Licenses and Permits
An independent contractor is only required to obtain the licenses and certifications appropriate to operate in her particular industry. A business owner must register his company with state and local departments, obtain building permits, zoning permits, secure a license to collect sales tax and an employer identification number from the IRS. An independent contractor is only obligated to pay federal and state income taxes on the fees he charges for his services. These requirements change if an independent contractor elects to hire employees to perform contracted services for a client.
Worker's Compensation Insurance
A business owner is almost always required to carry worker's compensation insurance. This type of coverage protects the employees of a business owner in the event that workers are injured on the job. An independent contractor is not eligible to obtain worker's compensation coverage. Additionally, an independent contractor may not receive benefits under an employer's worker's compensation coverage if she is injured while working under contract. An independent contractor must submit a claim under her existing health insurance policy to receive any compensation for work-related injuries.
Rights in Litigation
An independent contractor retains the right to sue an employer for negligence resulting in injury to the independent contractor. A business owner who hires employees does not have to worry about being sued because his worker's compensation insurance protects him from a lawsuit by paying for work-related injuries. An independent contractor may sue a client for the total value of an employment contract plus the cost of current and future medical bills. An independent contractor could go bankrupt while the lawsuit is in process if he is unable to work because of his injuries.
Control Over Work
An independent contractor has complete control over how a particular job is done within the parameters established by law. This includes methods of production, training and tools used to complete a given job. A business owner has control over how her employees perform work tasks, from interactions with customers to the methods used in creating products for sale. A business owner may usually terminate workers at any time but must also pay a monthly unemployment insurance premium to the state. An independent contractor is not required to pay unemployment insurance but is also ineligible to receive unemployment benefits.