As a small business owner, you likely have a lot of work on your plate that you cannot always complete on your own. You may want to learn how to hire an independent contractor to get some help with the many tasks you’re facing.
Hiring contractors versus employees comes with its own considerations. Make sure you’re aware of what you need to do before taking the steps to find someone to help out at your business.
What to do before hiring contractors
Federal Employer Identification Number (EIN)
You need to register your business correctly before you can hire anyone to work with you. However, you may or may not need an EIN based on what type of business you operate.
If you don’t want to hire any employees and your independent contractors will provide individual services you can simply use your Social Security Number instead of an EIN, as long as you operate a sole proprietorship or a single-member LLC.
You will, however, need an EIN if you want to hire employees, change your business structure, file for bankruptcy, or acquire an existing business and turn it into a sole proprietorship. You can acquire one by visiting the Employer ID Numbers page on the IRS website.
Register with your state
You’ll also need to comply with any state laws where you operate in regards to registering your business. For most businesses, doing this is “as simple as registering your business name with your state and local governments,” according to the SBA.
Take a look at your state’s registration guidelines on the SBA website to learn more about what you need to do.
Determine worker status
It can be difficult to understand if your worker is an employee or an independent contractor, but it is very important to get it right or you could face serious fines and penalties. According to the IRS, all workers are employees unless you can prove they are not through a series of tests, which vary by state.
If your answer is “yes” to these questions in regards to the work performed by the person you hired, then they are likely to be classified as an independent contractor:
- Were they hired for a temporary project?
- Can they choose where and when they perform the work?
- Do they provide their own materials for the work performed?
- Are they paid a rate that is invoiced to your company?
Learn more about independent contractors by checking out our article on the state and federal laws for determining worker status.
Write the job description
The first part of the job description should describe what the freelancer will be doing for your company. Then you should lay out what the relationship between you and the worker will look like.
Will they work from your business location? Are you expecting to work with them on a project-to-project basis? Do you want them to eventually join your team full time? Be sure to include these details so you can find the most appropriate personfor your project.
Build an independent contractor agreement
Your independent contractor agreement is a legally binding document that explains the business relationship between your business and the worker you hire for the project. Establishing this relationship and laying out the guidelines keeps everyone on the same page and may prevent legal issues in the future.
It’s best for a lawyer to draft up this important document for you, but make sure whoever writes it includes these details:
- A thorough description of the project
- Project timeline and deadlines
- Any other specifics you want to include
- Ownership rights, including intellectual property rights in terms of graphics or any other work they create
- A confidentiality agreement, if needed
- Payment and billing terms
- Termination clause
Note: In your termination clause, include how many days’ notice each party must give before ending the working relationship, as well as acceptable reasons for terminating the relationship. It’s important for small business owners to be specific in these clauses so they can end the relationship immediately, without notice, if the contractor is not performing up to the standards laid out in the contract.
Here are a few resources that will help you write your agreement:
- Free independent contractor agreements by state
- Sample contractor agreement
- Sample template of independent contractor agreement
What to do after hiring contractors
After you learn how to hire an independent contractor and you’ve made the steps to do so, you need to make sure you follow all the steps correctly or you could run into fines and fees from the government.
Your freelancer must fill out the Form W-9, or the Form W-8BEN if they are an international resident or citizen.
The Form W-9 verifies the name, address, and Taxpayer Identification Number (TIN) of your independent contractor. You’ll need this info to fill out Form 1099-NEC. You must keep this IRS form for at least 4 years.
Note: Make sure the worker exempts themself on the form from withholding income taxes. As an independent contractor, they do this on their own.
The Form 1099-NEC replaces the previous form 1099-MISC as a way to report independent contractor income. If you paid the worker at least $600 in the last year, did not process their invoices using a third-party system like PayPal, and they did not indicate on their W-9 that they run an S-Corp or a C-Corp, then youwill need to fill out a Form 1099-NEC.
After you fill out the form, send Copy A to the IRS and Copy B to your contractor by January 31, or the following Monday if it falls on a weekend. Be sure to also check your local laws, because some require you to file your 1099s with the state as well.
Get an invoice before making a payment
Don’t pay your contractor until they have sent you an invoice billing you for their services. Hold on to the invoices in your records. It’s also important to remember that the responsibility for business expenses falls on the contractor unless otherwise stipulated in your agreement, so don’t accept expense reports unless you’ve already laid out in the contract that you would.
Keep your records
Knowing how to hire an independent contractor the right way doesn’t protect you from all headaches—if you do hire a contractor, you’re more likely to get audited by the IRS. It’s for this reason that it’s extremely important to keep every single document relating to the working relationship, including contracts, payments, invoices, and government forms.
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