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 independent contractors versus full-time 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 an independent contractor
Get a Federal Employer Identification Number (EIN)
You need to register your business correctly before bringing on a new hire. However, you may or may not need an EIN based on what type of business you operate.
If you want to hire an independent contractor to 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 regard 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 before you hire an independent contractor.
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 avoid misclassification 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 it will likely be classified as an independent contractor relationship:
- Were they hired for a short-term project?
- Can they choose where and when they perform the work or do you have an office space prepared for them?
- Do they provide their own tools and materials for the work performed?
- Is their pay rate invoiced to your company?
- Are they working part-time or full-time?
For instance, in California, the Department of Labor has created an ABC test that helps employers classify any worker’s status. You can 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 person for 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.
When the time comes to hire an independent contractor, it’s best to get legal advice and have a lawyer draft up this important document for you. 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 non-disclosure agreement if needed
- Workers’ compensation 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 cancel the independent contract 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 independent contractor agreement:
- Free independent contractor agreements by state
- Sample contractor agreement
- Sample template of independent contractor agreement
What to do after you hire an independent contractor
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.
Have them fill out Form W-9
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.
Have them fill out Form 1099-NEC
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 you will 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 independent 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 the independent contractor 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 written contracts, payments, invoices, and government forms.
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