About 10% of all workers in the U.S. are independent contractors.
Small businesses and large corporations alike turn to contract workers to save costs on recruiting and replacing employees. Many choose to turn contractors into employees after an extended period of time.
Your business may not be able to afford an employee, but a part-time contractor can enable you to delegate tasks and focus on growing your business.
There are a number of things that you need to know about hiring contractors to make sure you do so legally. Read on to learn the ins and outs of hiring contract workers for your business.
1. Make Sure They’re Really Contractors
Companies are under a lot of scrutiny from the IRS and state tax authorities. They want to make sure that your business is paying its fair share in taxes, and companies have been accused of skirting the tax code by classifying employees as contractors.
That line is blurred because more employees are working at home because of COVID-19. States like California are bringing ballot measures to voters to ensure that contractors are properly classified.
How can you make sure that you have them classified properly? Check with the IRS and your state’s labor department.
This step needs to be right because the penalties are steep. You could pay as much as 20% of the wages paid, plus 100% of FICA taxes.
2. Create a Work for Hire Post
What is the job description of the contractor? To have a successful working relationship with a contractor, both parties need to be aware of the guidelines and expectations.
They may be able to work whenever they want as a contractor, but you need to make it clear that there are standards that need to be upheld.
Create a job post like you would for an employee. The difference is that you specify that this is a contractor role. You can post the scope of work and your budget on sites like Fiverr and Upwork.
3. Collect Resumes and Proposals
You’ll come across a number of proposals and resumes in response to your posting. Some you can disqualify right away. You make take the next step and ask for work samples and references.
You’ll also want to take the time to interview prospects about their experience. You also want to make sure they’re a good fit for your business and what your needs are.
4. Use the Correct Documents Upon Hire
There are documents that you want to have a new contractor fill out and sign before they start working for your company.
You’ll need to have the contractor fill out a W-9 form, which exempts your company from withholding taxes. It also ensures the contractor is able to work legally in the U.S.
You should have a written contract. This outlines the scope of work, deadlines, and deliverables. It also has the rate of pay and when payments are made. There should also be a clause as to who owns the work and the rights a contractor has to use the work.
For example, a graphic designer may want to use the work in their portfolio. The contract should say if and when this is OK.
A non-disclosure agreement (NDA) is good to have if the contract worker is going to work on a special project. If they were to reveal any of the work performed, would you lose a competitive advantage? If so, then have them fill out an NDA.
A final document that you may need to have is a non-solicitation agreement. For instance, if you have a marketing company and you hire a freelance designer to work on a project. They can’t directly approach the client to work for them.
5. Do You Provide Benefits to Contract Workers?
One common question is whether or not employers have to provide benefits to contractors. They also wonder if they need to provide workers compensation insurance.
You’re not required to provide benefits like healthcare or a 401k for contract workers. That’s one of the advantages of hiring contract workers because your business saves a lot of money.
What about workers compensation for contractors? The law is unclear in this area. Federal law doesn’t require it, but your state might.
6. Run Payroll and Provide Documentation
Each pay period, you’ll cut a check to the contractor. Remember, since it’s a contractor, you don’t need to withhold payroll and income taxes. The independent contractor is responsible for paying self-employment and income taxes on their own.
You just need to show the amount of money earned on the paystub. It makes processing payroll for contractors much less complicated.
In January of the following year, you’ll need to issue a 1099 form to your contractors that earn more than $600. This is sent to the contractor and you file a copy with the IRS.
A 1099 form is similar to a W-2 form, except it only applies to contract workers. You just need to total the amount of funds earned during the course of the year.
In 2020, the IRS is using a new form for 1099s. You usually would file a 1099-MISC, but the IRS switched to the 1099-NEC, which is for non-employee compensation.
Grow Your Business with Contract Workers
Hiring contract workers is a smart move for your business because you get the help that you need without having to pay for benefits or taxes.
You do need to make sure that you follow the laws when hiring a contract worker. Be sure that they are really contractors and not employees. They would shoulder the burdens of taxes and healthcare that you should cover.
If you found this article helpful, head over to the Small Business Forum to get business help from other entrepreneurs like you.