A small business guide on how to hire an independent contractor
There are various things that will influence the answer to that question, from pricing to business need, all the way to legal and tax conditions. If you’re not sure how to hire an independent contractor, don’t worry. It might all seem a bit daunting and confusing, but don’t worry, we’re here to help.
What is an Independent Contractor?
In its simplest definition, an independent contractor, freelancer or short-term worker is someone from outside of your company paid to complete a defined project for you over a specified period of time. The defined and time-based nature of their work is what makes them an independent contractor, rather than a part-time employee. We’ll go into more detail about the specific definition of an independent contractor later, as the nature of their work and employment is very important for abiding by federal laws.
What are the benefits of hiring an independent contractor?
Freelancers can be a really handy way of getting a quick job done cheaply. If you generally operate your business by yourself but need someone to lend an extra hand for a defined period, or someone with particular expertise to complete a specific project, an independent contractor will often make more sense than a new hire, even on minimum wage. Hiring a contractor should also save you time on training and onboarding, as they will usually bring a higher level of expertise to the project.
For small businesses, hiring independent contractors is often more financially attractive than hiring employees. Companies don’t have to withhold or pay taxes for an independent contractor. This means not having to pay payroll taxes such as Social Security, Medicare taxes or unemployment taxes, health insurance contributions, or other workers compensation that are the right of full-time employees. This lack of obligation is often why small businesses generally prefer to hire independent contractors to save tax money on hiring employees.
That’s why Snagajob connects companies with a wide pool of independent contractors with a range of skills and experience. We focus on finding the best staff for your business, so that you can expand without breaking the bank.
What are the differences between an independent contractor and an employee?
It’s really important you’re clear about the difference between an independent contractor and an employee. The IRS treats full-time employees and independent contractors differently, and misclassification of one for the other can land you in serious trouble.
The main difference comes down to legal and tax obligations. Employees are subject to all of the payroll taxes described above, and are guaranteed other rights under the Department of Labor’s Fair Labour Standards Act (FLSA). If you hire employees, you are legally obliged to perform tax withholding, with an independent contractor you are not.
However, whether a worker is an independent contractor or an employee isn’t just your decision. Various government bodies have criteria that need to be met to determine that a worker is an independent contractor, and therefore exempting you from their income tax responsibilities. Confusingly, different government bodies have different metrics to determine who is an independent contractor and who is not.
The IRS assumes all workers to be employees unless proved otherwise. They generally count independent contractors as any worker who:
· Can either profit or lose money on an opportunity (in the form of expenses)
· Is paid job-by-job
· Works for multiple companies at once
· Provides their own tools and/or materials for a project
· Sets their own work hours
· Pays their own expenses
· Pays their own assistants
The Department of Labor also needs to determine whether someone is an employee to determine whether they fall under the FLSA. According to the FLSA, conditions that determine an employee include:
· Their work being an integral part of your business
· A company having significant control over their work and hours
· They earn the same amount regardless of the situation (e.g. an hourly or yearly wage)
· Their employment is long-term or permanent
· Whether the employee operates an independent business
These are only some of the determining factors with these agencies, and some state laws may apply as well, so it’s important to research carefully to make sure you are not falling on the wrong side of employment law. If, after researching, you’re still not sure whether someone is an employee or an independent contractor, the IRS has Form SS-8 which you can file to ensure you are on the right side of income tax law. Make sure you do this before you hire your contractor.
What paperwork is needed for a 1099 employee?
When entering into an independent contractor agreement, it’s important to be completely above board with paperwork. The following written documents and tax forms are essential in making sure your business abides by IRS and Department of Labor regulations.
A Written Contract: Entering into any work engagement with freelancers or other short-term workers should begin with a signed written contract. This sets out the terms of the contractor relationship, including what the project is, the expected dates of delivery, and the fee paid. From a legal point of view, it’s important you have a new contract for each unique freelance project, even if you’re working with the same contractor. Also, a written contract should state that:
· The client (you, the small business owner), will not pay or withhold taxes or benefits contributions
· The contractor will use their own equipment during the project
· The client (you) may terminate the contract if the contractor violates the terms of your agreement, or the work is not up to standard
There are plenty of contract templates available online, though it is often a good idea to seek some legal advice if you have never drafted a contract before.
Form W-9: This IRS form is used to request the official name and Taxpayer Identification Number, or TIN, of the independent contractor, or the official legal entity they work under. A TIN can either be a social security number or an Employer Identification Number (EIN). When completing a W-9 Form, make sure the contractor ticks the box that exempts them from tax withholding; the contractor should file their own self-employment taxes as a separate business entity.
Form 1099-NEC: This is one of the 18 tax forms that give independent contractors the name “1099 employee”. This tax form replaced the Form 1099-MISC in 2020 to bring filing deadlines together, making it easier for businesses to file. You must fill out a Form 1099-NEC for each contractor you pay over the year, if they meet the following conditions:
· If you pay them $600 or more over the course of a year
· You did not pay them with a credit card, or through PayPal or similar third-party payment platform
· They did not state on the W-9 Form that they run an S Corp or a C Corp
If they do meet these conditions, you must fill out a Form 1099-NEC at the end of the tax year, by January 31st.
What is the best way to pay independent contractors?
Paying a contractor depends largely on the kind of work and the type of project they are working on. For some jobs, paying by the hour is typical, while with others paying a flat fee is more common.
The best way to keep track of payments is to request invoices from your contractors. Paying written invoices gives you a paper trail of what work has been done when and how much has been charged, making your bookkeeping life much easier. Make sure you are not being charged expenses: this is the responsibility of the independent contractor.
How can Snagajob help you with finding gig workers?
Snagajob makes it easy to find shift workers. Simply sign up, post your shift, and find the perfect worker for you. We’ll deal with all of the admin, allowing you to focus on your work.