Here are some initial pros and cons of hiring entrepreneurs to help your business grow. Before hiring and paying an independent contractor, make sure that this employee is really an independent contractor and not an employee. Misclassifying an employee as a CI can result in state and federal fines and penalties. Read this article for more information: How worker status is determined by the IRS and states. Of course, there are exceptions to every rule. For example, California recently passed Proposition 22, which exempts app-based transportation companies like Lyft and Uber from classifying drivers as employees. While some drivers may meet the criteria for employee status, the law allows them to be classified as independent contractors. Check out sites like eLance and Odesk and Freelance. Use LinkedIn and other social networks to let people know you want to hire a contractor. And talk to your friends, family, and professional acquaintances to see who they might recommend. The most important document you need to obtain from an independent contractor is Form W-9.
Anyone you hire as an independent contractor must complete and sign this form before you start working for your company. The person must put a tax identification number (social security number, employer identification number (EIN) on the form. If you hire an independent contractor, you do not have to meet any of these requirements. The independent contractor pays his own taxes for self-employment. All you have to do is report the amount you`re compensating the contractor to the IRS and your state tax department. An independent contractor is a freelancer or self-employed worker who provides a service and is hired by a company or individual to perform a specific task. Skills such as writing, graphic design, and editing are often the types of work needed temporarily or in the short term, but almost any type of work can be done as an independent contractor. Depending on the length of your relationship, it may be easier to add your contractor directly to your company`s payroll, even if they`re not full-time. Some payroll services like Gusto can automatically file 1099s and send the forms to freelancers, so you don`t have to deal with them.
You may also want to study how your business is legally organized to make hiring easier. However, hiring an independent contractor is not necessarily cheaper than hiring an employee. Some independent contractors charge much more than you would pay an employee for similar work. Yet many prefer to hire contractors rather than employees because tax and legal burdens are lower. Typically, you`ll need to withhold income taxes, withhold and pay Taxes on Social Security and Medicare, and pay unemployment tax on wages paid to an employee. You usually don`t have to withhold or pay taxes on payments to independent contractors. In addition to form W-9, you`ll need new specific hiring documents for each independent contractor you hire: Make sure the employee you hire is really an independent contractor, not an employee. If you hire a new employee as an independent contractor and that person should be an employee, your company may have to pay fines and penalties. • Your ability to work independently and meet required needs• Work with a professional relationship and abide by confidentiality agreements If, after reviewing all three categories of evidence, it is still unclear whether an employee is an employee or an independent contractor, Form SS-8, Determination of Employee Status for Federal Labor Tax Purposes and Income Tax Withholding PDF can be filed with the IRS. The form can be submitted either by the company or by the employee. The IRS verifies the facts and circumstances and formally determines the employee`s status. If you classify an employee as an independent contractor and do not have a reasonable basis to do so, you may be liable for tax on that employee`s payroll (the relief provisions explained below do not apply).
For more information, see Section 3509 of the Internal Revenue Code. You may want to ask contractors to sign non-disclosure agreements (NDAs) to protect non-public business information. Find out if a unilateral or reciprocal confidentiality agreement makes the most sense and look at some examples below: This makes it very difficult to know if an employee is an independent contractor or an employee. Working for rental conditions – protects your rights to the work done It may cost more per hour to hire a temporary worker, but you save paperwork and don`t have to worry about your employee`s status. Be sure to work with a reputable agency that meets all of the employer`s tax and insurance requirements. If you are unable to obtain restrictions when needed, the IRS will file a valuation against you as a percentage of what you paid to the contractor. Holding back backups can be a burden for you. With a few exceptions, if you pay the IC $600 or more for services provided throughout the year, you must provide the IC with Form 1099-MISC. January 31 is usually the due date by which your business must have sent Form 1099 to its recipient. For electronic delivery, a company must have delivered the email to the recipient to inform them that their form is ready. Zenefits offers the possibility to prepare and store the 1099-MISC for independent contractors. Form W-9 serves the same purpose as a Form W-4 for newly hired employees.
In determining whether the person providing the service is an employee or an independent contractor, all information demonstrating the degree of control and independence must be considered. In 2018, there was a California Supreme Court case (Dynamex Operations West, Inc. v. Superior Court of Los Angeles County) that made it difficult for California companies to classify workers as independent contractors. The case created a checklist, called the ABC test, with which employers can classify employees. The IRS considers all employees to be employees, unless proven otherwise, and uses a series of tests and considerations that vary by state to ensure that the person actually qualifies as an independent contractor. So be very careful that you are the boss, so decide when and how independent contractors are paid. If your company`s bank account doesn`t offer a convenient all-in-one banking solution that includes accounting, invoicing, or secure payment processing, there are many reliable resources available online. When hiring a contractor, it is important to clarify the role, compensation, and other legal implications of the position (including scope, terms of payment, and ownership of the work product).
These resources will help you generate these documents: Many small business owners have their exit strategy in mind. Entrepreneurs can help your business in times of growth or difficulty, but they don`t add value to its core business. .