Running a small business, or any business, is no small feat. Staying on top of your clients, projects, and employees is its own full-time job. If you’re also completing other tasks then you understand the meaning overworked. Depending on your company, and where you’re located, it can be difficult to find help in your business.
For many business owners, it becomes more beneficial to hire independent contractors. But how do you hire and pay independent contractors? Where do you start looking? Although independent contractors have been around a while, their popularity has been rising recently. We’ll walk you through many of the common questions and next steps to hire and pay independent contractors.
What Is An Independent Contractor?
Simply put an independent contractor is what the name implies. Someone hired for a job, typically via a contract, that operates independently of the hiring party. It’s important to understand that independent contractors are not employees. They do not receive benefits or even tax deductions from the hiring company.
Many contractors operate as a sole proprietorship or LLC, depending on their personal business practices. These contractors pay for their own materials, licenses, taxes, health care, and more. You can think of a contractor as a business relationship instead of as an employee. This allows flexibility but means you’ll have different processes than with an employee.
Where Should You Look for Independent Contractors?
This will depend on the needs you have and the industry you are in. If you’re hiring a contractor to work remote chances are you can use websites like UpWork or post your own listings. But if you’re looking for people to come to a job site or office you may want to focus on local job boards or organizations. There are a few online resources for this, but sometimes hiring for a physical location requires using your local area.
How Should You Hire An Independent Contractor?
Much like when you’re searching for a contractor, hiring one will depend on your needs and industry. Using contractors locally may resemble more of a traditional employee relationship. If you’re hiring for a local position you might conduct a few interviews and check the candidate’s portfolio or qualifications.
When hiring online and using a service you’ll receive proposals, samples, and rate quotes immediately that you can make decisions on. Similarly, posting your own ads will likely result in the same results as posting to UpWork. Keep in mind that the net will be cast a bit wider and may result in a higher number of unqualified candidates.
Typically, an independent contractor should provide you with some specific information upfront. Proposals take the place of cover letters and contain qualifications and interest in your project. Most contractors should also provide their rates almost immediately. If you’ve never worked with an independent contractor before then you might be a bit surprised by the rates. It’s important to keep in mind that contractors are running their own businesses. They are usually paying their own taxes and health care costs. Understanding and respecting contractor rates will help you build stronger relationships with them.
What Paperwork Do You Need For An Independent Contractor?
Unlike a regular employee, you don’t need as much paperwork with an independent contractor. Your main legal requirement for a contractor is a W-9 form. These are like W-4s you might be more familiar with but are specifically for contract workers. Much like your employee’s W-4s help create a W-2 come tax time, the W-9 helps create a 1099-MISC form. There are services that independent contractors can use to provide you with a W-9 that you may want to look into. Any contractor should be somewhat familiar with, and ready to provide a W-9.
Additionally, you’ll want to keep a copy of the contractor’s resume on file. This might seem like an odd requirement but in case of an audit, you’ll be thankful you have it. You’ll also want to keep a copy of the contract you sign with the independent contractor. Don’t you think you need a contract? Even the most simple or short project should have some form of a signed agreement. You have to remember this is a business relationship and you would never enter a business relationship without a contract.
Last, but certainly not least, you need to be ready for tax time. Keep track of any and all payments you make to your independent contractors. It’s important to remember that independent contractors do not have FICA taxes withheld from their paychecks. The contractors pay their own taxes every year and will handle that on their end as a business entity. If you are paying $600 or more during the year then you will have to use the 1099-MISC form to report the payments. This form also goes to the contractor, much like a W-2 goes to an employee. You’ll also need to submit a 1096 form to the Social Security Administration before the end of February.
Best way to pay independent contractors
There should be a pay rate in the written agreement you have with your independent contractor. This will always vary by industry, discipline, and even contractor. For example, some contractors charge per hour, per day, per milestone, per project, or per word count. This will also determine the pay schedule your contractor is on. It is typical to include the pay schedule in the contract before the project begins.
Services like UpWork will allow you to use their schedulers. Additionally, you could use one of the many payroll services available online. It’s also possible the independent contractor already has a payment system set up. However you choose to pay your contractors, you’ll want to make sure it is accurate and on time.
When Do You Withhold Taxes from Independent Contractors?
As mentioned earlier, you will almost never withhold taxes from independent contractors. Taxes that relate to the contractor will be paid by that contractor with their own taxes. There are, however, a few circumstances that would cause you to withhold income tax. If the taxpayer (contractor) hasn’t given you their taxpayer identification number or if the number is wrong, you will need to withhold. Lastly, if the IRS notifies you of the contractor not reporting all income in prior years then you will also have to withhold.
Many businesses can benefit from hiring independent contractors. Depending on your needs, you might even want to hire a contractor for on-going work. Understanding your requirements and how to approach hiring and paying contractors is important. We hope this guide helps to clear up and questions you might have with the process.
What do you hire independent contractors for? Let us know in the comments below!