US Company Hiring Independent Contractors: All You Need to Know
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Running a business is an arduous process that can take up all your resources. This often leads to burnout, exhaustion, and sometimes even business failure. However, it doesn’t have to be like that. You can relive some of it by outsourcing it to independent contractors. They can perform the tasks you need - for less time and frequently less money. If you are a small business owner, grab a pen and paper - in this article, you will read all you need to know about hiring independent contractors.
The number of freelancers and contractors has been growing over the years but the COVID-19 pandemic has accelerated it even more. Many have started their own business to enjoy the freedom and flexibility it brings. But what does that mean for business owners? Well, there are many ways this can help your business, and we’ll list the three most important ones:
A cost-effective way of hiring
Compared to full-time or part-time workers, hiring independent contractors significantly decreases labor costs. The reason for that is mostly the accompanying taxes and required benefits. While an employee has the right to health insurance, worker’s compensation insurance, necessary tax withholdings, and minimum wage, independent contractors don't. Thus companies have way less paperwork and the cost of their work is decreased. This isn’t the deciding benefit, but it is certainly a very convincing one.
Wider talent pool
If you expand your workforce with remote independent contractors, you are exposing your business to a global talent pool. Since independent contractors take care of their own equipment and taxes, you don’t need to constrain yourself with the realities of a local job market. This allows you to find the best talent and enhance your business success.
Contractors have higher expertise and autonomy
When you run a business you can't control every part of the process, or even worse, do everything yourself. To have a clear head and a focused mind, you should delegate some tasks. You can delegate these tasks to someone who's not your full-time employee. It can be someone you hire to perform a particular task - with quality, and without too much supervision.
When should you hire independent contractors?
Now that you know why you should hire an independent contractor, let's discuss the timing.
When you need something done only once or on needs-basis
There is no sense in hiring a full-time employee for something you will do once or only a couple of times. Hiring an independent contractor gives you staffing flexibility.
When you need a task done quickly
If you are facing a new and complicated task that has to be done as fast as possible, training a staff member won’t lead to the desired outcome. Focus on fixing the problem that is in front of you, and you can work on expanding your team’s knowledge later.
When you need an expert
Sometimes you won't have the expertise needed in your team. That's when you should consider hiring an independent contractor to help you deliver the results. Be it designing a one-pager or a quick software fix, an independent contractor can come in with their expertise and handle the task at hand.
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What do you need to know before hiring independent contractors?
Chances are, by now, we’ve convinced you that hiring independent contractors can be a very good idea for your business. Hiring contractors is easier than hiring full-time employees. Yet, it isn’t entirely free from legal issues, tax forms, and complex state laws. Let’s start with what you need to do before considering working with a contractor.
Determine what Tax ID you need to use as a business owner
In order to process all the necessary forms, you need to have a Tax ID (taxpayer identification number). A federal employer identification number, EIN, issued by the IRS, is necessary in order to proceed. However, certain business entities don’t need it, and they can use the Social Security Number instead. You won’t need it if you don’t have any employees, or if you own a single-member LLC. You can use your SSN if you own a sole proprietorship as well. The moment you want to hire employees, you need to have an EIN. Read here more about all of the TINs and how you can obtain them.
Educate yourself about employee misclassification
When it comes to permanent employees and contractors, their duties and tasks, the division isn’t as clear as you might think. Although most of it has to do with the degree of control, it isn’t that simple to draw a straight line. Employment laws have become more strict over time and the obligations towards the state and the employee are quite different. This, unfortunately, means that the line can often be blurry, causing misclassification, which leads to IRS fines and back taxes. You can read a very detailed guide about this issue here, but here are the most important distinctions. You should consider your worker a permanent employee if:
- You control their working hours, shifts, schedule, break time, and vacation
- You determine the method of working and provide resources and tools
- You are responsible for their training, development, and promotion
- You are their only employer and you have a stable, long-term relationship
Draft an independent contractor agreement
In most cases, if someone has had a bad experience with an independent contractor, they skipped this step. The same goes for businesses hiring freelancers. A written agreement benefits both parties and protects them. There are several important conditions and information you should put in your independent contractor agreement.
- Project scope, method of working, resources to be used,
- Desired outcome and result (preferably with time-sensitive KPIs)
- Deadlines and delivery methods
- Confidentiality and NDA (non-disclosure agreement), when necessary
- Pay rate, payment method, and schedule
- Consequences of not meeting the terms of the agreement
- Division of intellectual property
- Terms of termination
You should present all your potential hires with this document and edit it according to each particular situation. Have in mind that this makes both parties equally responsible, so make sure to include anything else that might be specific to your situation.
Necessary steps after hiring an independent contractor
Although there are far fewer obligations for contractors than for employees, there are still a couple of mandatory steps.
Start by managing all the paperwork
To begin with, your contractor needs to fill out Form W-9 (or Form W8-BEN if they’re an international resident or citizen). All the necessary data will be on it, which you can later use for every tax form. This document, where it is required to exempt the contractor for withholding, needs to be kept on file for at least four years. As you are already familiar with, you have a lot more obligations towards your FTEs. As an employer you are responsible for employee's:
- Tax withholding
- Social security taxes
- Medicare taxes
- Unemployment insurance
- Income taxes
- Employee benefits such as workers’ compensation insurance.
It’s completely different when you hire a contractor or a freelancer - they file and pay taxes on their own (such as income and self-employment taxes).
Read here all about independent contractor taxes
You are, however, required to fill out an IRS Form 1099-NEC (previously known as Form 1099-MISC) if you’ve paid a contractor more than $600 in a year. This form needs to be filled by both you and your contractor.
Besides signing a written agreement, you should spend some time discussing the conditions, the nature of the relationship, the preferred method of working, and what is known as a psychological contract. The more you invest now into setting up a solid foundation, the fewer issues you will have in the future when faced with disagreement, unfavorable feedback, and additional requests.
Evaluate the outcome and future steps
Frequent check-ins with your contractor can only improve your relationship. If you are content with the results and want to prolong or expand the relationship, you might want to convert the contractor to an employee. On other hand, if you believe that the quality should improve this gives you a chance to offer feedback, provide them with additional resources and support, or simply terminate the relationship.
How to make the most out of your independent contractor?
Well, first make sure you are aware of all the benefits. When you remove the cost of federal taxes, payroll taxes, and various benefits protected by the FLSA, Fair Labor Standards Act, you realize how budget-friendly your new hire actually is. Contractors aren’t protected by the Department of Labor and they don’t even have a minimum wage, so you can work with them based on the conditions you both have agreed upon.
Secondly, your contractor relationship needs to be founded on trust, mutual benefit, and a very strict verbal and written agreement. It is important that you establish a connection, the one that will improve communication and trust but also protect your own interest in the partnership. Lastly, carefully choose what you will outsource so you can maximize your investment. Any menial, back-office, repetitive, and time-consuming tasks that don’t have to be done by you can be delegated to someone who is faster and more efficient.
In addition to this, all the complex tasks that would take you hours to understand and deliver, and then you never have to do them again, should also be given to a competitive self-employed individual. Opening up your business to anyone else, sharing the responsibility and the ownership isn’t easy to anyone who has built their business from the grown-up. But everything that is good for the business is great for you, so make sure to recruit an independent contractor that can help you share the burden and take your business to the next level.