What Is a Contractor? Meaning, Definition & Types

In employment and tax discussions, a contractor usually means a person or business engaged to provide services without being treated as the client's employee. But the label alone does not decide legal status: federal tax law, federal wage law, and state law can apply different tests to the same relationship.

Note: "Contractor" is also used informally to mean a construction or trades professional (a general contractor who builds or renovates). This page covers the employment/tax sense of the word — the one that determines how a worker is paid, taxed, and classified — which applies whether the work is construction, software, consulting, or anything else.

Contractor meaning: common types

"Contractor" is an umbrella business term, not one single legal classification.

Independent contractor — a self-employed service provider when the applicable legal test supports independent status.
1099 contractor — informal shorthand for a nonemployee service provider whose payments may be reported on Form 1099-NEC. A 1099 does not prove legal status.
Freelancer — an industry label often used for independent service providers.
Subcontractor — a person or business engaged by a contractor for part of a larger job; the term does not itself decide worker status.
General contractor / trade contractor — construction uses of the term that can involve separate licensing and employment rules.

For worker-status questions, use the applicable test. See How to Classify Workers.

Contractor vs employee: what actually determines the difference?

For federal employment taxes, the IRS considers the whole relationship using behavioral control, financial control, and the type of relationship. No single checklist item decides status.

Control: the right to direct how work is performed can point toward employee status.
Financial independence: investment, expenses, profit/loss opportunity and market activity can matter.
Relationship: permanence, benefits, contracts and the nature of the services can matter.
State law: some states use different or stricter standards.

Compare costs with the Employee vs Contractor Guide or Cost Calculator.

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How independent contractor status is classified

Calling someone a contractor, paying without withholding, or issuing Form 1099-NEC does not settle status. The IRS uses common-law factors for federal employment taxes. The Department of Labor uses an economic-reality analysis for federal wage law and in 2026 has proposed a streamlined five-factor test. States may use their own standards; California generally begins with the ABC test unless an exception or other rule applies.

Read How to Classify Workers and Employee Misclassification Penalties.

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How contractors get paid

Independent businesses may charge hourly, by day, by project, by retainer, or under another negotiated model. Hourly billing does not automatically make someone an employee, and project billing does not automatically make someone a contractor. Use the Contractor Rate Calculator or Contract Rate vs Salary Calculator.

Contractor taxes

A genuinely self-employed person generally reports business income and expenses and may owe self-employment tax. The 15.3% rate is not simply applied to every dollar received: Schedule SE generally applies it to 92.35% of net self-employment earnings, with the Social Security portion subject to an annual wage base.

Form 1099-NEC is an information return, not a legal classification certificate. See Independent Contractor Taxes.

Frequently Asked Questions

What does contractor mean?

In employment and tax discussions, contractor usually means a person or business engaged to provide services without being treated as the client's employee. The label alone does not decide legal status.

What is an independent contractor?

An independent contractor is a self-employed service provider when the facts satisfy the legal test that applies. For federal employment taxes, the IRS considers behavioral control, financial control and the type of relationship.

What is the difference between a contractor and an employee?

The actual working relationship controls, not just the contract label or payment method. Control, financial independence, permanence, benefits and the nature of the services can all matter.

What is a 1099 contractor?

"1099 contractor" is informal shorthand for a nonemployee service provider whose compensation may be reported on Form 1099-NEC. Receiving a 1099 does not by itself prove independent-contractor status.

Is an independent contractor self-employed?

Yes. Self-employment tax is generally calculated under Schedule SE on 92.35% of net self-employment earnings, subject to the annual Social Security wage base and other rules.

Is a subcontractor always an independent contractor?

No. "Subcontractor" describes a position in a contracting chain, not necessarily legal worker status. A subcontractor can be an independent business, can employ workers, or can itself be treated differently under applicable law.