5 Things You Need to Know About Independent Contractors

by QuickBooks

5 min read

Independent contractors, many of whom consider themselves freelancers or consultants, are booming across many industries. Contractors can be beneficial additions if your business is picking up steam, especially if your company seeks to expand its workforce without taking on full-time employees. For instance, if your business needs a website that requires ongoing maintenance, you might hire a contractor to take on the job. In this circumstance, odds are that you would save a considerable amount of money by not hiring an in-house employee.

There are numerous benefits to hiring independent contractors, but there are also many details to be wary of when hiring one. If you are leaning toward hiring an independent contractor, here are five things you need to consider to keep your business—and legal standing—in the right direction.

1. Independent Contractor vs. Employee

Properly classifying a worker as an independent contractor or an employee is essential. The determination of someone operating as a contractor versus an employee can be a fine line that changes on a case-by-case basis.

To help employers determine how to classify a new hire, the IRS uses a 20-factor test to determine if someone is an independent contractor. According to the IRS, “The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.”

2. The Importance of Properly Classifying Independent Contractors

Federal and state tax agencies are inclined to confirm reported employment services. Unfortunately, this means that businesses who hire independent contractors are much more likely to find themselves being audited.

From the government’s standpoint, more employees equates to a more reliable tax source, which is collected by the employer throughout the year. An independent contractor, on the other hand, must pay taxes on their own every quarter, which can cause confusion and irregular payment schedules.

Prior to contracting the services of contractor, a good safe measure is to obtain documentation that declares their self-employed status. Consider doing this through the use of a contract for your new contractor to sign, such as an Independent Contractor Agreement. Just remember to treat your new freelancer like a contractor, and not like an employee, in accordance with the aforementioned IRS test.

Employers typically won’t pay or withhold any taxes on payments to independent contractors. Even though you may not deduct taxes from your new contractor’s check, you may need to file IRS Form 1099-MISC if you pay your contractor more than $600 a year for his or her services. Failure to classify your workers properly and file the appropriate tax documents can lead to steep IRS fines. For an in-depth guide to managing taxes when you employ contractors, click here.

3. The Benefits of Using an Independent Contractor

There are many substantial benefits and freedoms when it comes hiring an independent contractor. These include:

  • Financial Savings: Independent contractors will often cost more per hour than employees. But at the end of the day, that number will never come close to someone on salary. Additionally, by hiring contractors, employers avoid the cost of Social Security and Medicare taxes, unemployment insurance and workers’ compensation insurance, as these costs are paid by the contractor him or herself.
  • Less Equipment: Whether they’re computers or office supplies, it is standard for contractors to provide their own equipment. This may vary by industry, however, and how specialized your particular business is.
  • Less Office Space: Most freelancers prefer to work out of their own offices or homes. Therefore, employers can save on cost per square foot.
  • No Training Required: Most independent contractors are specialists in their fields. So when using one, you avoid the costs and time associated with training.
  • Freedom With Staffing: Many businesses have varying workloads, meaning that there will be a range of different types of projects from time to time. Therefore, rather than having to unnecessarily keep employees around, employers are free to scale their workforce up and down according to demand.

4. Proceed With Caution

As a business owner, you always want to protect yourself and be mindful of any possible consequences from your choices, good or bad. Although you may know your business’ rights and obligations with respect to employees, there are some different precautions to take when it comes to independent contractors:

  • Intellectual Property: No matter what your field is, it’s important to take ownership of intellectual property into account. Some contractors, particularly writers and artists, may not be keen on releasing rights to their work. Therefore, in the contracting process, always define which party will possess ownership.
  • Workplace Safety: In general, it’s a good idea to make sure your office is as injury-proof as possible. When it comes to contractors, however, take the protector mentality to the next level. As contractors are not covered by your workers’ compensation plan, they may be able to sue if an injury takes place on the job.
  • Lack of Control: Unlike employees, independent contractors have the freedom to work for multiple parties. Therefore, the employer won’t have full control over the consultant’s work and schedule. The best way to safeguard your investment is to obtain quality referrals and implement suggested deadlines.

5. How to Find and Hire an Independent Contractor

If you are on the prowl for a local contractor who can be available in person, there are a few ways you can approach this:

  • Placement Agencies: Since they’ve already sifted through applications from many jobseekers, these agencies can act as your human resources department. The downside of this route is that placement agencies charge a fixed percentage or fee for each person hired.
  • Reach Out to Other Professionals in Your Industry: This is a great way to find referrals to contractors that similar businesses have had success with. This also includes referrals from other contractors that you have a relationship with.
  • Post jobs on your website: In addition to your website’s natural traffic, you should share the link to social networking sites such as LinkedIn and Facebook.

If you’re seeking an independent contractor who can work remotely/virtually, consider these online resources:

Contractors can be a relatively low-cost alternative to full-time employees and other types of workers. But those monetary benefits come with some restrictions that you must adhere to. To ensure you properly classify your workers and avoid IRS penalties, see our Independent Contractor vs. Employee Wizard. If you’ve hired contractors in the past year and need to manage your tax forms, check out our guide to 1099s for employers who hire contractors.

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