Independent Contractor vs. Sole Proprietor: What’s the Difference?

You’ve found the perfect freelancer for your project. They’re skilled, available, and ready to start. But then you get to the paperwork and realize you’re not entirely sure how to classify them.

Are they an independent contractor? A sole proprietor? Does it matter for how you handle payments and tax forms?

It does matter—and getting it wrong can create compliance headaches that turn a straightforward working relationship into a legal mess.

The main differences between independent contractors and sole proprietors come down to how income gets tracked and how work gets delivered to your business. Independent contractors typically provide services and receive 1099 forms from the companies that hire them. Sole proprietors often sell products or run businesses where they handle their own income tracking, but the relationship with your company might be structured differently.

Here’s why this distinction matters for your business: misclassifying workers can lead to penalties, back taxes, and legal issues that are expensive to fix. Understanding the difference between these two types of self-employed workers helps ensure you’re handling payments, tax reporting, and working relationships correctly.

Whether you’re hiring someone for a one-time project or building ongoing relationships with freelancers and vendors, knowing how to classify workers properly protects your business and keeps you compliant with employment regulations.

Because the last thing you want is to discover you’ve been handling worker classification incorrectly after you’ve already established multiple working relationships.

What is a sole proprietor?

A sole proprietor is a person who owns and operates an unincorporated business by themselves. Under a sole proprietorship, the business owner earns all of the business’s profits and is also accountable for any incurred debts.

Examples of sole proprietors include:

• Freelance writers or graphic designers
• Florists
• A local artist
• Web designers
• Food truck operators

What makes a sole proprietor different from other business owners?

Sole proprietorship is the most common type of business in the U.S. This is a unique business model because it encompasses anyone who runs an unincorporated business, from freelance writers to local artisans.

Sole proprietors differ from other business owners in a few key ways:

1. They are the sole influence of the business: The sole proprietor is the only entity responsible for business management, dealings, and decisions.
2. They are not legally separate from their business: Businesses run by sole proprietors are not registered with the state, and therefore, the business owner is personally responsible for profits, debts, damages, etc.
3. No legal paperwork is required: A sole proprietor can get to work as soon as they have their business idea. No legal paperwork is required.

Do sole proprietors get a 1099?

Sole proprietors typically do not receive a Form 1099-NEC. A 1099-NEC form is a tax form that the Internal Revenue Service (IRS) uses to record compensation received by someone other than an employer throughout the year. As self-employed individuals, or 1099 workers, typically don’t have an employer, these forms are common among those running their own businesses.

This is another way sole proprietors differ from other types of self-employed people or business owners. Sole proprietors typically do not receive this form, though some long-term clients may provide one to a sole proprietor. Usually, though, sole proprietors track their own business expenses and file their own taxes.

Read also: Form 1099-NEC vs. Form 1099-MISC

What is an independent contractor?

Independent contractors, also often called contract employees or freelancers, are people who offer services to the general public and administer those services based on a written contract. To be considered an independent contractor, these services cannot be provided under the supervision or control of an employer.

Examples of independent contractors include:

• Doctors or surgeons
• Veterinarians
• Lawyers
• House painters or renovators
• Mechanics

Is an independent contractor self-employed?

Independent contractors are self-employed. This means that they perform their specified trade without supervision or guidance from an employer. This also means that independent contractors set their own working hours and provide their own tools to do the job. The contract between the contractor and the person receiving the services is decided only between those two parties without any sort of agency or third-party.

There are some risks to independent contracting, especially globally. In some countries, legislation like the IR35 is in place to distinguish between contractors and employees.

Sole proprietor vs. independent contractor

What’s the difference between sole proprietors and independent contractors?

The most notable difference between sole proprietors and independent contractors is the way they document their profits and pay their taxes.

Independent contractors who earned more than $600 from a client will receive a 1099-NEC form detailing their earnings. Sole proprietors are fully responsible for tracking their own income. Independent contractors file their 1099 form with the IRS and also submit a self-employed tax form. Sole proprietors, on the other hand, usually file their business taxes along with their personal taxes.

These business models also differ in the way they provide their services or products. Independent contractors provide a service under a specified employment agreement, while sole proprietors provide a product to a customer.

An independent contractor could be a self-employed construction worker whom a customer hires to build a new shed in the backyard. A sole proprietor may run a copywriting business where they produce blog content for several different clients.

FAQs: Sole proprietorship and independent contracting

Let’s answer some frequently asked questions about sole proprietorship and independent contracting.

Does a sole proprietorship have to be registered?

Sole proprietors are not required to register their businesses with the state. As soon as you begin conducting business, you are considered a sole proprietor.

However, they’ll typically need to register with their local government to legitimize their business. In many states, they need to file their business name with the county clerk. Depending on their business activities, they may also need to obtain a business license or zoning permit, and if they want to hire employees, they need an Employer Identification Number (EIN).

Do all small business owners get a 1099?

They will only receive a 1099 form if they have worked for someone as an independent contractor.

Note: People selling products to customers don’t receive a 1099 form. Only those who perform services or work for a customer or client report their earnings on the form.

Is an independent contractor considered a sole proprietor?

Independent contractors aren’t usually sole proprietors, but they can be under specific circumstances. If they own their own business where they provide services under employment contracts, they would be an independent contractor who is also a sole proprietor. In most cases, however, independent contractors are not sole proprietors.

Is it possible to be both a sole proprietor and an independent contractor?

It is possible to be both a sole proprietor and an independent contractor. People who own their own businesses and provide services to clients will be both a sole proprietor (by running their own business) and an independent contractor (by providing a service under an employment agreement with a client).

An example of this is a freelance editor who runs their own copy-editing business. Because they run a copy-editing business, they are a sole proprietor. And because they negotiate a contract with each specific person who hires them to do edits, they are an independent contractor.

How do sole proprietors and independent contractors differ from LLCs?

The most prominent difference between self-employed people like sole proprietors and independent contractors and a Limited Liability Company (LLC) is that an LLC is required to register its business. In turn, an LLC will receive more liability protections than those who are self-employed and solely responsible for those costs.

Multiple people typically run an LLC, while sole proprietors and independent contractors often work alone. This means that LLCs are separate from the business owner, whereas sole proprietors and independent contractors are directly tied to their businesses.

Keep your relationships with global talent compliant and simple

Getting worker classification right isn’t just about following the rules—it’s about protecting your business from expensive surprises down the road. Misclassify someone as an independent contractor when they should be an employee, and you could face back taxes, penalties, and legal issues that cost far more than getting it right the first time.

The complexity only increases when you’re working with people in other countries. Different places have different rules about what constitutes an employment relationship, and what looks like a straightforward contractor arrangement in the U.S. might be classified as employment somewhere else.

That’s where employers like you use Pebl’s global expertise. Whether you’re working with domestic contractors, international freelancers, or thinking about converting valuable contractors to full-time employees, we help you navigate the classification requirements and stay compliant across different jurisdictions.

No more guessing about worker classification. No more wondering if your contractor relationships will create compliance issues. Just clear guidance and support for building the workforce you need.

Ready to simplify how you work with independent talent globally? Let’s talk about how Pebl makes international workforce management straightforward.

This information does not, and is not intended to, constitute legal or tax advice and is for general informational purposes only. The intent of this document is solely to provide general and preliminary information for private use. Do not rely on it as an alternative to legal, financial, taxation, or accountancy advice from an appropriately qualified professional. The content in this guide is provided “as is,” and no representations are made that the content is error-free.

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