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Independent contractors are becoming more and more of a popular option for business owners.
However, with the benefits employers get by hiring this type of worker, there are also a few to watch out for. The biggest one is ensuring that the worker you hire as an independent contractor truly qualifies as one. If you misclassify an independent contractor, you can get in a world of trouble.
To help avoid that and get you through the process of hiring independent contractors, we have created this guide. Read on to learn all you need to know about hiring independent contractors!.
Why Independent Contractors Are So Important
Independent contractors (IC), often referred to as contractors or freelancers, are essentially a much less complicated version of a typical employee.
For starters, you only hire independent contractors when you need them. You aren’t required to keep them on the payroll in the same way that you may be required to do so with an employee.
In addition to that, most independent contractors work from home with their own equipment, so you are not responsible for providing them with a desk, workspace, or equipment (unless specified in the contract).
But the most important part of independent contractors is that they pay their own income tax and self-employment tax on their earnings. This means you do not have to calculate and deduct Social Security or Medicare taxes from their pay, making things easier for you.
There are many reasons why a company may choose to hire an independent contractor instead of a traditional full-time employee.
Some advantages of hiring independent contractors include:
- Saving money. If they are only needed for a specific amount of time or a short-term project, it is cheaper for the company to pay someone for that amount of time instead of a long-term full-time employee. You are not paying for medical benefits, paid vacation time, office space, workers’ compensation insurance, and more for independent contractors, leading to further cost savings.
- Getting access to specialized skills. Let’s say your business needs a new logo. You don’t have the needs or money to hire a full-time graphic designer, but you can pay an independent contractor who is a highly skilled designer to create a logo for you.
- Flexibility. As the employer, you retain a lot of flexibility to be able to hire on independent contractors only as needed. If your work is seasonal or highly project-based, this flexibility is essential.
- No need to train them. Because you are hiring them for their specialized skills, most of the time, independent contractors will be able to jump in and start working on your project right away. You will not need to pay for a long training or onboarding process.
- Reduced liability. Regarding independent contractors, a business who hires one is not necessarily liable for injuries, wrongful termination, harassment, and more. (Consult a lawyer and your state and federal liability to confirm this, and ensure your contract spells out all details regarding liability.)
While you do still maintain some control over your contractors, they are independent business owners and do not report to you in the way a regular employee does. You may be able to put some limitations or restrictions on them, but it may not be as much as you think.
In any case, it is imperative that all of these factors are addressed in your contract or agreement you signed with the contractor. These issues are not always clear at first glance.
Take, for example, Uber drivers. There were questions about what level of limitations Uber was allowed to place on their drivers. This came to a head in a court case in April 2018, Razak v. Uber Technologies, Inc.
In that case, the judge decided that limitations including fumes, specific shoes to protect the floors of the cars, and other things such as banning loud music in cars with passengers does not mean that Uber’s drivers should be classified as employees rather than independent contractors.
The judge took a look at the different factors that would deem Uber drivers independent contractors versus employees. Some of those factors include:
- The right to control. How much control does Uber have over how the IC does the work?
- Profits and losses. How much opportunity does a driver have for profit or loss?
- Investment. How much is the driver invested in the equipment needed to drive?
- Special skills. Does the driver require special skills to do their job?
- Relationship permanence. How permanent is the driver’s status as an Uber worker?
Since the judge determined all of the above to lean more towards the independent contractor side versus the employee side, all Uber drivers are now treated as independent contractors.
Quick Tips to Improve Independent Contractors Today
Now that you understand the benefits of hiring independent contractors, it’s time to fill you in on what you can do to improve your experience of working with contractors.
Read on for some quick tips that you can implement into your hiring practices today.
Tip #1: Correctly Classify All Independent Contractors
As you saw from the Uber case above, knowing whether the person you are trying to hire is an employee or an independent contractor is very important.
There have been countless misclassification cases, which can lead to all sorts of problems, including some major penalties.
To make things simple, the IRS considers every worker that you hire to be an employee unless you can prove otherwise. However, that proof comes by completing federal tests to ensure that the person should be categorized as an independent contractor.
One test, for example, is the ABC Test. A 2018 Supreme Court case in California made it more difficult for businesses in California to classify workers as independent contractors. As a result of this case, the ABC Test was created, which is a checklist that employers use to help them classify employees.
According to the California Labor & Workforce Development Agency, a worker is considered an employee unless all three of the following conditions are met:
- The worker is free from the control of the company concerning work performed.
- The worker performs work that is not a core part of what the business does.
- The worker needs to have an independent trade, job, or business in the industry that you hire them for.
However, there are some exceptions to these rules, including different propositions that exempt certain companies from classifying their workers as employees.
We understand that this may get a bit confusing, so to help, here are some questions that you can answer to determine whether your worker is an independent contractor:
- Is this person hired for something temporary?
- Can this person choose where to do their work and when?
- Does this person use their own materials to complete the work?
- Is the person paid a flat fee or hourly rate that is invoiced to your company?
If you answered “yes” to these questions, then your worker is an independent contractor.
For more information on how to classify your workers, be sure to head to the Independent Contractor (Self-Employed) or Employee page on the IRS website to learn more.
Tip #2: Use HR Software
Because the classification of a worker as an independent contractor is such an important part of the process, we suggest that you implement HR software to keep the designation clear.
You can see all seven of our picks for the best HR software in our in-depth review and buying guide. There are some great options on the market, but our top pick for companies working with independent contractors is BambooHR.
This HR software option works great for employees and independent contractors, so you can have all the information for all types of workers in one place. In addition, BambooHR is simple to use and allows you to assign different permission levels to various users.
Postmates is one of BambooHR’s biggest clients, and Postmates drivers are all independent contractors. So there’s the proof you need that BambooHR is a strong choice for your business if you’re looking into independent contractors.
There are two package options with BambooHR–Essentials and Advantage. Plus, you can add several add-ons to your plan, such as payroll services, time tracking features, and performance management tools.
Both plans offer some key HR management features and other tools that can help make managing your workers a much easier process. BambooHR does not publicly list their pricing, so you’ll need to contact them for a free price quote.
Tip #3: Know What Forms You Need
Two key forms are part of the independent contractor process. The first is the Form W9.
A W9 form must be filled out by the worker, and it verifies their name, address, and Taxpayer Identification Number (TIN), which for many is their Social Security number.
In addition, the worker should exempt themselves from withholding on this form since they will be filing their taxes as an independent contractor.
The W9 does not need to be sent to the IRS but is one you are required to keep on file for at least four years.
If you paid any independent contractors more than $600 over the course of the calendar year, then you need to file Form 1099-NEC. There are a couple of other instances in which this form is required:
- If you did not use a credit card or a third-party platform such as PayPal or Venmo to process invoices.
- If the contractor did not check a box on their W-9 stating that they are an S or C corp.
The 1099-NEC reports how much money the contractor earned from your company. This form is to be filled out by you and sent to both the IRS and your contractor before January 31 each year. This is what the contractor will use when doing their taxes to report income.
Tip #4: Require Invoices
You typically won’t have to fight independent contractors on invoicing, as they all want to get paid.
You should require that the contractor send you an invoice for all work performed. You can choose how often this should happen if the contractor will be doing ongoing projects for you. You can ask for weekly, biweekly, or monthly invoices, and the invoice and payment schedule should be spelled out in the contract.
Your company should establish when the payment is due. Many companies opt for net 30, which means the payment is due 30 days after the invoice date. It is up to the contractor to determine whether they will tack on any fees for late payments, another thing typically included in the initial contract.
Long-Term Strategies for Independent Contractors
If you plan to bring on independent contractors on an ongoing basis, here are some strategies to ensure you stay compliant and your ICs remain happy.
Doing these will improve your experience of working with contractors long-term and make it a process you don’t dread.
Create a Written Contract
Because an independent contractor is not an employee, you must create a contract that outlines the expectations of the contractor and your business while working together.
Where traditional employees have a job description that describes their duties, contractors have a contract (hence their name).
This agreement should outline the specific project you hired them to do along with the responsibilities, deliverables, prices, and deadlines. This contract not only makes sure both parties are on the same page in terms of what work needs to be done, but it also serves as protection for both parties in case an issue ever arises.
Your contract should include:
- A description of the project
- Pricing rates and payment terms
- Company information
- Contractor information
- Signatures from both parties
If you aren’t sure where to start on a contract, search online for free templates or samples you can use to inspire your own. The contractor you hire may also have their own contract you can review and sign instead of you providing one.
Before the work with your independent contractor begins, you must establish strong lines of communication. Because this person is not an employee, they are not held to the same expectations of communication that an employee may be.
Thus, determine whether you should communicate exclusively via email or if the contractor prefers phone calls, text messages, or using a platform like Slack.
Also discuss how check-ins on the project will take place. Will you have weekly progress reports? Weekly Zoom calls? Work with the contractor to decide what is best for both of you.
Ensure that the deliverables have been communicated clearly and that all expectations are understood and accepted by both parties.
Micromanaging is frowned upon for any type of worker, but it becomes even more important for you to stay from this management style when working with independent contractors.
If you are constantly emailing or checking in with your contractor to see what they’re doing, they will struggle to get the work done in a timely fashion. Not to mention, you will likely annoy them to the point that you may drive them away from working with you again in the future.
Understand that independent contractors have chosen this route of work because they value independence. If you don’t trust the contractor to get the job done without you micromanaging them, then hire someone else. Pick someone you feel will get the job done without having to check in every step of the way.
Trust is a top priority for contractors, so show your trust by allowing them to do their work without constant interruption from you. As long as your expectations are being met and the work is getting done, you likely won’t feel the need to micromanage anyway.
Keep All Records
As mentioned above, you must keep the W9 on file for four years. However, this isn’t the only record you should keep on file for your independent contractors.
You want your books to be as accurate as possible, so you’ll want to keep all records of business transactions and contractor paperwork in one place.
Here are some of the critical records you want to have on-hand for your contractors:
- Form W9
- Proof of payment
- Form 1099-NEC
Agree on Form of Payment
You have options when it comes to paying your independent contractors. You can use payroll software in-house to do this, you can outsource to an online payroll service, or you can also simply pay via credit card or PayPal. It depends on both what payment options you offer and what the contractor accepts.
Before starting any work, make sure you and the contractor agree on the amount you are paying them for the project. If the project is ongoing, determine whether you will pay them weekly, monthly, or a different time frame.
You should include payment amount and methods are in the contract to ensure that everyone is on the same page.
Since there are essential steps to take when hiring independent contractors, you may want some additional information to make sure you do things correctly.
To help with the payment process for contractors, consider investing in an online payroll service. We have put together an in-depth review of the best payroll services, so be sure to check that out.
To help keep your independent contractor contracts organized, you may want to use software that will help ensure everything is in one place. Here are our top picks for contract management software.