Independent Contractor Agreement

An independent contractor agreement is a written contract between a business (the “client”) and a self-employed individual or company (the “contractor”) that defines the terms of a working relationship. This agreement helps establish that the worker is an independent contractor rather than an employee – a distinction with major legal, tax, and liability consequences under both Minnesota and federal law.

When to Use This Template

• You are hiring a freelancer, consultant, designer, developer, writer, or other self-employed worker to perform specific services
• You are an independent contractor and want a written agreement with your client
• You need to document the scope of work, compensation, timeline, ownership of work product, and other terms
• You want to help establish the independent contractor relationship for tax and employment law purposes

How to Use This Template

1. Download the template in your preferred format (PDF or DOCX).
2. Fill in the client’s full legal name and business address.
3. Fill in the contractor’s full legal name (or business name, if the contractor operates as an LLC or corporation) and address.
4. Describe the scope of work in detail:
   • What specific services will the contractor provide?
   • What are the deliverables?
   • What are the deadlines or milestones?
   • What is excluded from the scope?
5. Set the compensation terms:
   • Payment amount (flat fee, hourly rate, per project, etc.)
   • Payment schedule (upon completion, monthly, upon milestones, etc.)
   • Method of payment (check, direct deposit, etc.)
   • How expenses will be handled (reimbursement, included in fee, etc.)
6. Define the term of the agreement:
   • Start date and end date (or state it is ongoing until terminated)
   • How either party can terminate the agreement
   • What notice is required for termination
7. Review and customize the following provisions:
   • Intellectual property: Who owns the work product?
   • Confidentiality: What information must be kept confidential?
   • Non-compete / non-solicitation: Any restrictions after the engagement ends (note Minnesota’s new restrictions below)
   • Liability and indemnification: Who is responsible if something goes wrong?
   • Insurance requirements: What insurance must the contractor carry?
8. Both parties sign and date the agreement. Each party should keep a signed copy.

Minnesota’s Independent Contractor Law

Minnesota law provides a specific statutory framework for determining whether a worker is an independent contractor or an employee. Understanding this law is essential for anyone using this template.

The Common Law Test ( Minn. Stat. 181.722 )

As of 2024, Minnesota determines independent contractor status using the common law employer-employee test – the same test used under workers’ compensation ( Minn. Stat. § 176.011 ) and unemployment insurance ( Minn. Stat. § 268.035 ) law. The most important factor is whether the hiring party has the right to control the manner and means by which the work is performed.

Key factors courts consider include:

1. Right to control how, when, and where the work is done (most important factor)
2. Method of payment – by project/deliverable vs. hourly/salary
3. Who provides tools and equipment – the worker or the hiring party
4. Worker’s ability to hire assistants or subcontract
5. Permanency of the relationship – project-based vs. ongoing
6. Worker’s opportunity for profit or loss
7. Worker’s investment in their own facilities and equipment
8. Whether the work is part of the hiring party’s regular business
9. Whether the worker holds out to the public as an independent business
10. Skill required for the work
11. Who is responsible for expenses – tools, materials, office, travel

Additional Factors for Construction ( Minn. Stat. 181.723 )

The construction industry has a separate, more stringent 14-factor test for independent contractor status. Construction contractors must meet all 14 requirements, including maintaining a separate business, carrying workers’ compensation insurance, having a written contract signed within 30 days of work commencing, and invoicing under the business name.

Consequences of Misclassification

Misclassifying an employee as an independent contractor can result in:

• Back taxes and penalties from the IRS and Minnesota Department of Revenue
• Unpaid employment taxes (Social Security, Medicare, unemployment insurance)
• Liability for unpaid benefits (workers’ compensation, health insurance, retirement contributions)
• Penalties under Minnesota law, including civil fines and potential criminal penalties for knowing violations
• Wage and hour liability for unpaid overtime, minimum wage violations, and other wage claims
• Penalties from the Minnesota Department of Labor and Industry (DLI)

Key Contract Provisions Explained

Scope of Work

The scope of work is the most important part of the agreement. Be as specific as possible about:

• What the contractor will do
• What the contractor will deliver
• What standards or specifications apply
• What is not included

A vague scope of work is the most common source of disputes between clients and contractors.

Intellectual Property and Work Product

Determine who will own the work product:

• Work made for hire: The client owns the work product. Note: under federal copyright law, “work made for hire” has a specific legal definition and only applies in certain circumstances.
• Assignment: The contractor creates the work and then assigns (transfers) ownership to the client.
• License: The contractor retains ownership but grants the client a license to use the work.

Include specific language addressing ownership of intellectual property in the agreement.

Non-Compete Agreements

Insurance Requirements

Consider requiring the contractor to carry:

• General liability insurance – protects against claims of bodily injury or property damage
• Professional liability (errors and omissions) insurance – for professional services
• Workers’ compensation insurance – required if the contractor has employees
• Commercial auto insurance – if the contractor uses a vehicle for work

Tax Obligations

For the Client (Hiring Party)

• If you pay a contractor $600 or more in a calendar year, you must file IRS Form 1099-NEC by January 31 of the following year
• You do not withhold income tax, Social Security, or Medicare from payments to independent contractors
• Request a completed IRS Form W-9 from the contractor before making the first payment

For the Contractor

• You are responsible for your own self-employment taxes (Social Security and Medicare – currently 15.3% of net earnings)
• You must make quarterly estimated tax payments to the IRS and the Minnesota Department of Revenue
• You can deduct business expenses on your federal and state tax returns
• Keep detailed records of all income and expenses

Common Mistakes to Avoid

1. Using this agreement to disguise an employment relationship. If the worker must work set hours, at your location, using your tools, under your direct supervision, they are likely an employee regardless of what the contract says.
2. Not describing the scope of work in sufficient detail. Vague descriptions lead to disputes about what was included.
3. Not addressing intellectual property ownership. If you do not specify who owns the work product, disputes can arise later.
4. Forgetting the 1099 requirement. Failure to file Form 1099-NEC can result in IRS penalties.
5. Including non-compete clauses without legal review. Minnesota’s 2023 non-compete ban may apply.
6. Not requiring insurance. If the contractor causes damage or injury, and they lack insurance, you may be liable.
7. Not getting a W-9 before the first payment. You need the contractor’s taxpayer identification number for 1099 reporting.
8. Exercising too much control over how the work is performed. The more control you exercise, the more likely the worker will be classified as an employee.

Related Resources

How to Start an LLC in Minnesota

• Minnesota Department of Labor and Industry - Independent Contractor – state guidance on worker classification
• IRS - Independent Contractor vs. Employee – federal guidance on worker classification
• Minnesota Secretary of State - Business Filing – register a business in Minnesota