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 unlike an employer, the person or entity hiring the independent contractor has no obligation to withhold income taxes from the contractor’s fees or to provide the contractor with any employee benefits. 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 North Carolina, 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 North Carolina are responsible for paying their own Social Security and Medicare taxes, as they are not considered employees. The hiring party does not withhold income taxes from payments to independent contractors and is not required to provide them with employee benefits such as health insurance, workers' compensation, or unemployment benefits. The classification must be made according to the IRS's right-to-control test, which examines factors such as the degree of control the hiring party has over the worker, the worker's investment in equipment, the opportunity for profit or loss, and the permanency of the relationship. Misclassification can lead to legal consequences, including penalties and back taxes. It is advisable for both parties to clearly understand their roles and to document their agreement to ensure compliance with state and federal regulations.