Why can’t expense reimbursements be included in an Independent Contractor Agreement?

When working with independent contractors, it's important to maintain a clear legal boundary between contractor and employee status. One area where this boundary can easily become blurred is in how business expenses are handled.


Independent Contractors Are Responsible for Their Own Costs

Independent contractors operate as separate business entities. They are hired to deliver a specific service or result and are expected to manage how that work gets done, including covering their own tools, equipment, and travel expenses.

Including reimbursements for those costs in a contract can suggest a level of control or financial dependency that aligns more closely with an employment relationship, rather than a contractor agreement.


Why This Matters

Reimbursing expenses for independent contractors may raise red flags by implying:

  • Employer-like control over the contractor’s work process.

  • Financial dependence, suggesting the contractor isn’t truly independent.

  • Integration into the client’s business, rather than operating independently.

These implications can increase the risk of misclassification, which may result in:

  • Retroactive employee status

  • Tax and social security liabilities

  • Legal penalties and interest

  • Obligations to provide employee benefits


What to Do Instead

To stay compliant and reduce legal risks:

  • Have contractors build expenses into their rates: This ensures the contract reflects true independence and avoids separate reimbursements.

  • Avoid listing reimbursements in the agreement: If extra costs are anticipated, contractors can include them in their total service fee or invoice as part of the final deliverable amount.


Learn more about Contractor Missclassification and how to ensure agreements remain compliant: What is Employee Misclassification? + How to Avoid The Risk 

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