As the owner of a growing business, you may be facing an important decision. How should you handle the extra workload? Should you take on a new staff member, or should you hire an independent contractor?
Your choice can affect your company’s efficiency and, most importantly, its bottom line. This article will examine the procedures and the documents you’ll need to hire an independent contractor.
Hiring an Independent Contractor
An independent contractor is a self-employed individual (or entity) that provides a service or goods to their clients under the terms of a written contract or verbal agreement. The jobs may be temporary or ongoing, depending on what the client needs.
Also known as freelancers, independent contractors are not new to the workforce, but they have become more prevalent in recent years during the rise of what is called the “gig economy.”
Is an Independent Contractor an Employee?
An independent contractor is not an employee. The main difference between the two workers is the amount of control an employer has over their work.
Independent contractors have autonomy in how they complete the work as long as they complete it as agreed under the terms of their contract. They may work on projects for multiple clients, while an employee works regularly for a single employer.
In line with recent changes in the Employee or Independent Contractor Classification Under the Fair Labor Standards Act, the classification between independent contractors and employees also considers the economic reality of the worker's relationship with the employer, focusing on the extent of economic dependence.
This nuanced approach ensures a more accurate assessment of the working relationship, beyond just the level of control.
Employers must currently classify their workers as “employees” or “independent contractors,” according to IRS guidelines. Here are the important differences.
Employees – These workers receive a regular wage and have taxes and Social Security payments withheld from those wages. Their work and their work schedule are determined by the employer. Full-time employees have more benefits than part-time employees. These perks include severance pay, workers’ compensation, and anti-discrimination protection, for example.
Independent contractors – These workers can decide when and where they work on their projects. They must pay their own taxes and Social Security and receive no benefits from clients other than the agreed-upon payment.
What Documents Are Needed to Hire an Independent Contractor?
If you’ve made the decision to hire an independent contractor for a project, you’ll need to gather some information. (Do not have them fill out your standard employment application; reserve those forms for your employees.) Begin with these basics:
- Contractor’s name and business name (also known as DBA name)
- Type of business (sole proprietor, partnership, LLC, or corporation)
- Phone number
- Business address
- Email address
- Employer Identification Number (EIN) or Social Security Number (SSN)
Form W-9
The IRS requires independent contractors to complete and sign a Form W-9. This form requests the contractor’s name and Taxpayer Identification Number (TIN), which may be either an EIN or an SSN. The contractor should check the box that exempts them from tax withholding.
Businesses use the information on the W-9 when filing their taxes. The form serves basically the same purpose as a W-4 form for new employees.
You may be able to send and receive these signed forms electronically.
Read more: Tax Guide for Independent Contractors
How to Fill Out a W-9 for an LLC
Form 1099-NEC
Businesses must carefully record all payments to independent contractors throughout the year and report the total to the IRS.
Beginning with the 2020 tax year, if you pay an independent contractor $600 or more a year, you must complete a Form 1099-NEC. (Form 1099-MiSC, which businesses previously used to report these payments, is now used for other types of payments.) You must send a copy of this form to your independent contractors by Jan. 31.
References
Just as you do when you interview employees, you should ask prospective independent contractors for a list of references. Then you should call these references with specific questions about the contractor’s work and work ethic. Here is a list of questions to get you started:
- What kind of work did the contractor do for you?
- Was there regular and adequate communication?
- Was the job completed on time?
- Was the job completed on budget?
- Were you satisfied with the outcome?
- Would you hire the contractor again?
In some cases, you may also want to check the Better Business Bureau and do a background check. Some states require a background check for people working with children or elderly or disabled individuals.
Depending on the type of work you are hiring a contractor to do, it’s also a good idea to ask to see samples of their work.
Written Independent Contractor Agreement
To avoid any misunderstanding, it’s always the best practice to create and sign a written legal contract with an independent contractor.
The contract should clearly describe the terms and length of the project or service as well as all payment details (such as pay rate, deposit, retainer, and billing details).
Some contractors provide work that may be considered intellectual property. In these cases, the agreement should include sections about ownership, non-disclosure, and confidentiality. A non-disclosure agreement protects your private business information by preventing an independent contractor from disclosing it to others or using it for their own benefit.
To help you with this essential part of hiring an independent contractor, LawDistrict provides templates for your needs.
Start Your Independent Contractor Agreement
Extra Agreements
Since the type of work independent contractors provide can range from a cleaning service to a graphic designer, here is a list of other agreements you may need to consider.
- Supplies. Include details about what supplies, materials, office space, and equipment you will provide versus what the independent contractor must supply.
- Expenses. Be clear on whether the contractor will or will not be reimbursed for any out-of-pocket expenses.
- Taxes. Include a statement that the contractor must pay their own federal and state income taxes.
- Permits, license, and liability coverage. Put in writing that the contractor is responsible for obtaining any permits, licenses, or insurance policies needed to perform the work.
- Termination or dispute. Explain how disputes will be settled and how the contract can be ended.
- Indemnification. This clause protects one party from liability if a third party is harmed in any way.
By the end of 2020, there were an estimated 65 million independent contractors in the U.S., and that number is expected to reach more than 90 million. Many companies are continuously hiring these workers under both short- and long-term contracts.
You may need some tips on hiring the best contractor. Once you understand how to do so, you can hire the right independent contractors and ensure they are an important asset to your company. By doing so, you can save time and money and gain the services of someone who specializes in a line of work or a particular project.
As the owner of a growing business, you may be facing an important decision. How should you handle the extra workload? Should you take on a new staff member, or should you hire an independent contractor?
Your choice can affect your company’s efficiency and, most importantly, its bottom line. This article will examine the procedures and the documents you’ll need to hire an independent contractor.
Hiring an Independent Contractor
An independent contractor is a self-employed individual (or entity) that provides a service or goods to their clients under the terms of a written contract or verbal agreement. The jobs may be temporary or ongoing, depending on what the client needs.
Also known as freelancers, independent contractors are not new to the workforce, but they have become more prevalent in recent years during the rise of what is called the “gig economy.”
Is an Independent Contractor an Employee?
An independent contractor is not an employee. The main difference between the two workers is the amount of control an employer has over their work.
Independent contractors have autonomy in how they complete the work as long as they complete it as agreed under the terms of their contract. They may work on projects for multiple clients, while an employee works regularly for a single employer.
In line with recent changes in the Employee or Independent Contractor Classification Under the Fair Labor Standards Act, the classification between independent contractors and employees also considers the economic reality of the worker's relationship with the employer, focusing on the extent of economic dependence.
This nuanced approach ensures a more accurate assessment of the working relationship, beyond just the level of control.
Employers must currently classify their workers as “employees” or “independent contractors,” according to IRS guidelines. Here are the important differences.
Employees – These workers receive a regular wage and have taxes and Social Security payments withheld from those wages. Their work and their work schedule are determined by the employer. Full-time employees have more benefits than part-time employees. These perks include severance pay, workers’ compensation, and anti-discrimination protection, for example.
Independent contractors – These workers can decide when and where they work on their projects. They must pay their own taxes and Social Security and receive no benefits from clients other than the agreed-upon payment.
What Documents Are Needed to Hire an Independent Contractor?
If you’ve made the decision to hire an independent contractor for a project, you’ll need to gather some information. (Do not have them fill out your standard employment application; reserve those forms for your employees.) Begin with these basics:
- Contractor’s name and business name (also known as DBA name)
- Type of business (sole proprietor, partnership, LLC, or corporation)
- Phone number
- Business address
- Email address
- Employer Identification Number (EIN) or Social Security Number (SSN)
Form W-9
The IRS requires independent contractors to complete and sign a Form W-9. This form requests the contractor’s name and Taxpayer Identification Number (TIN), which may be either an EIN or an SSN. The contractor should check the box that exempts them from tax withholding.
Businesses use the information on the W-9 when filing their taxes. The form serves basically the same purpose as a W-4 form for new employees.
You may be able to send and receive these signed forms electronically.
Read more: Tax Guide for Independent Contractors
How to Fill Out a W-9 for an LLC
Form 1099-NEC
Businesses must carefully record all payments to independent contractors throughout the year and report the total to the IRS.
Beginning with the 2020 tax year, if you pay an independent contractor $600 or more a year, you must complete a Form 1099-NEC. (Form 1099-MiSC, which businesses previously used to report these payments, is now used for other types of payments.) You must send a copy of this form to your independent contractors by Jan. 31.
References
Just as you do when you interview employees, you should ask prospective independent contractors for a list of references. Then you should call these references with specific questions about the contractor’s work and work ethic. Here is a list of questions to get you started:
- What kind of work did the contractor do for you?
- Was there regular and adequate communication?
- Was the job completed on time?
- Was the job completed on budget?
- Were you satisfied with the outcome?
- Would you hire the contractor again?
In some cases, you may also want to check the Better Business Bureau and do a background check. Some states require a background check for people working with children or elderly or disabled individuals.
Depending on the type of work you are hiring a contractor to do, it’s also a good idea to ask to see samples of their work.
Written Independent Contractor Agreement
To avoid any misunderstanding, it’s always the best practice to create and sign a written legal contract with an independent contractor.
The contract should clearly describe the terms and length of the project or service as well as all payment details (such as pay rate, deposit, retainer, and billing details).
Some contractors provide work that may be considered intellectual property. In these cases, the agreement should include sections about ownership, non-disclosure, and confidentiality. A non-disclosure agreement protects your private business information by preventing an independent contractor from disclosing it to others or using it for their own benefit.
To help you with this essential part of hiring an independent contractor, LawDistrict provides templates for your needs.
Start Your Independent Contractor Agreement
Extra Agreements
Since the type of work independent contractors provide can range from a cleaning service to a graphic designer, here is a list of other agreements you may need to consider.
- Supplies. Include details about what supplies, materials, office space, and equipment you will provide versus what the independent contractor must supply.
- Expenses. Be clear on whether the contractor will or will not be reimbursed for any out-of-pocket expenses.
- Taxes. Include a statement that the contractor must pay their own federal and state income taxes.
- Permits, license, and liability coverage. Put in writing that the contractor is responsible for obtaining any permits, licenses, or insurance policies needed to perform the work.
- Termination or dispute. Explain how disputes will be settled and how the contract can be ended.
- Indemnification. This clause protects one party from liability if a third party is harmed in any way.
By the end of 2020, there were an estimated 65 million independent contractors in the U.S., and that number is expected to reach more than 90 million. Many companies are continuously hiring these workers under both short- and long-term contracts.
You may need some tips on hiring the best contractor. Once you understand how to do so, you can hire the right independent contractors and ensure they are an important asset to your company. By doing so, you can save time and money and gain the services of someone who specializes in a line of work or a particular project.
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