How to hire an independent contractor: Everything you need to know

As a business owner, have you found yourself working longer and longer hours as you’re faced with an ever-growing to-do list? If so, it may be time to hire some additional help. Hiring an independent contractor can help you save on payroll costs or bring some much-needed expertise to a one-off, unique project you’re working on. These projects must be outside of the usual operations of your business.

Unlike a full-time or statutory employee, contracted employees allow you to eliminate some payroll-related costs and liabilities that you would otherwise have. It may also make more sense logistically since some positions won’t be needed on a full-time or even part-time basis.

Let’s look at how to hire an independent contractor, including how to choose one, pay one, and what paperwork you’ll need.

• Hiring an independent contractor in 4 steps
• When to hire an independent contractor
• What is an independent contractor
• How independent contractors vary from other workers
• Tax implications for businesses with independent contractors
• Best practices for an independent contractor

Hiring an independent contractor in 4 steps

Finding an independent contractor can be relatively simple. Just be aware that the rules surrounding hiring contractors vary by state. Be sure you check employment laws for your state before committing.

 A simple Google search should bring up plenty of results in any niche or industry from your surrounding area. The trick is choosing the right contractor for the job. 

Step 1. Vet the contractor

You wouldn’t hire any random person to watch your children, and you shouldn’t hire just anyone for your business either. It’s a good idea to thoroughly vet your candidates before moving forward. This includes checking:

• References: These are often listed on the Better Business Bureau website.
• Permits and licenses: Ask for the contractor’s business license and check with your state’s licensing board.
• Credentials (like liability insurance): Ask for proof of insurance and verify with their insurance company.
• Service location: Make sure they service your area.
• Rates and fees: Compare rates to other local contractors to ensure you aren’t being overcharged.

Step 2. Create an independent contractor agreement

An independent contractor agreement is a legal contract that discloses the nature of the work being performed, including the timeline and other important details. 

Finding a boilerplate independent contractor agreement is simple, but you will likely need to adjust the details for your specific situation. 

Here’s some basic information you’ll need to include in your agreement:

• The location where the work is being performed
• Services rendered by the contractor
• Timeline of work, including the start and end date of the contract
• Details of both the contractor and the client's responsibilities
• Details of compensation (amount and payment cadence)

Keep in mind that this is not an exhaustive list and different states may have varying requirements. Each business arrangement may require specific verbiage to ensure both parties are on the same page. It may also be a good idea to contact a legal professional to either draw up a contract for you or review the one you create.

Step 3. Send and collect paperwork

Collecting paperwork is an important step in the process. You’ll need to collect a signed agreement and a Form W-9 from each independent contractor you hire. 

A W-9 is an informational document that houses the contractors:

• Name 
• Address
• Taxpayer Identification Number(TIN)

This information is what will be used to fill out their 1099-NEC, the record of payment they use to file their tax returns. Most importantly, the TIN is crucial for you as a business owner when it comes to verification. 

TIN verification

Once you receive the contractor’s W-9, it’s important to verify the TIN through the IRS website. If you wait too long (like January) to report an incorrect TIN, you could be penalized by having to pay all backup withholding on the contractor's behalf.

Backup withholding is currently a 24% tax rate.

Instead, check their W-9 before work starts and request a corrected TIN if you received the wrong one or didn’t receive one at all. 

QuickBooks Contractor Payments can help simplify the process of collecting W-9s from your independent contractors. Using our secure online portal, contractors can complete their own W-9s, saving you time and helping ensure the information you collect from your team is accurate.

Step 4. Decide on a payment schedule

Have a conversation about pay rates and terms before putting them into a written contract to make sure it works for both parties, and that there are no surprises or misunderstandings. 

This is especially important if you plan to pay over time instead of making a single upfront payment. The payment structure you and your contractor agree upon will largely depend on the type of work that needs to be done and the expected project duration. 

Some popular contractor payment schedules include:

• Deposit and final payment: Pay a free upfront, usually a percentage of the project’s total cost, and then pay the remaining balance once the contractor completes the project. This may be the best option if you hire a contractor for a relatively brief one-time ob. 
• Time-based installments: Break up the total project price into equal installments and pay the contractor on a set schedule. The schedule can be bi-weekly, monthly, or on some other timeline. This is generally the best option for business owners who don’t want to pay a massive amount at once and for contractors who will be working on one project for an extended period of time. 
• Milestone payments: Pay your contractor whenever they meet previously agreed upon milestones. This option works well when they need to complete a series of well-defined smaller tasks to complete a larger project.
• Retainer payments: Send your contractor a recurring payment if you anticipate needing their services in the future to secure their services and keep them “on-call.” This option may be preferable when working with consultants or other gig workers that you utilize frequently.

When to hire an independent contractor

There are several instances in which hiring an independent contractor may be a good option for your business. Not only can it save you time, but it can also save you money. It may be time to hire a contractor if you:

• Have one-off, short-term, or recurring projects that won’t require a full-time or part-time employee — these are unique, one-off projects 
• Would rather work with someone who is an expert and already has their own tools
• Need specialized support in a specific area of your business like bookkeeping or marketing, but don’t need full-time support — full time support requires you to hire an employee. 

The most important consideration is to weigh the cost against the benefits. If what you gain from hiring an independent contractor outweighs the cost, consider making the leap.

For example, if you aren’t a tax professional, hiring a bookkeeper with accounting expertise could save you a lot of time (time is money!) and help you find advanced tax benefits and savings. You’ll get time back to focus on other aspects of your business and will likely save money in the process. Use QuickBooks Online to help track income expenses and stay ready for taxes. 

What is an independent contractor?

An independent contractor is a nonemployee who’s hired for a specific task or job function, also called a subcontractor. The specifications of their job are outlined in their contractor agreement, which we’ll discuss later. 

According to the IRS, “Anyone who operates an independent trade and offers services to the general public without the umbrella of a corporation is an independent contractor.”

Below we’ll look at some common examples of independent contractors.

Independent contractor examples

Independent contractors can perform an array of functions for any profession or industry. Some common examples of independent contractors include:

• Lawyers: If you’re starting a new project or work in a heavily regulated industry, they can provide crucial insights and legal advice. 
• Accountants: If you need help with overflow work or your company would benefit from more specialized bookkeeping knowledge, a financial expert could be useful. 
• Web developers: If your company needs a new website or some updates, a programmer can help so you don’t need to hire more staff or an agency.
• Photographers: If you need new headshots or promotional photos, they can take professional images for commercial use. 
• Designers: If you’re ready to add a new product and you need a package design, they can use their graphic design skills to create labels that represent your company. 
• Virtual assistants: If you ever need help setting appointments or handling communications, an online administrative assistant can give you some coverage. 
• Copywriters: If you need help writing marketing and sales materials that help your company bring in more revenue, a good writer can help you promote yourself and disseminate information. 

Is an independent contractor a 1099 worker?

Yes, an independent contractor is a 1099 worker. If you hire one and pay them for $600 or more in services, you will need to send them a 1099-NEC at the end of the year so they can file their taxes. You will be responsible for completing this form and sending it to your independent contractors before January 31. 

QuickBooks offers 1099 e-filing services with QuickBooks Payroll1 and QuickBooks Contractor Payments. When you use QuickBooks Payroll or Contractor Payments, Your 1099s will be automatically generated and e-filed for you, saving your time and helping you prepare for tax season. You can file unlimited 1099s, including 1099-NEC and 1099-MISC2.

How independent contractors vary from other workers

There are several employment types, all with different benefits and disadvantages for a small business owner. We’ll cover what the comparison looks like between contractors and other employees, including taxes and benefits.

Independent contractors vs. employees

Independent contractors should not be confused with traditional employees. As we’ve discussed, an independent contractor operates as a nonemployee, meaning they do not receive:

• 401(k) packages
• Health insurance
• Paid time off

Salaried and hourly employees are eligible for all of these benefits, plus a portion of their FICA taxes are paid by their employer. 

 FICA Taxes: Employee vs. independent contractor

The Federal Insurance Contributions Act (FICA) mandates a U.S. federal payroll tax known as FICA taxes. Everyone is required to pay these taxes, whether you are employed by a company or self-employed as a contractor. 

FICA taxes total 15.3% of a worker’s income. Here are the differences to pay attention to:

Independent contractors pay a total of 15.3%; they are responsible for paying all of the FICA tax. 

W-2 employees (also called full-time or part-time employees) get half of their FICA taxes paid by their employers; employees pay 7.65%, and their employer pays 7.65%.

How to avoid employee misclassification

If you’re unsure of a worker’s employee status, fill out IRS Form SS-8 to check. Taking this extra step will help ensure you won’t owe a contractor unpaid wages and the IRS back taxes later on due to misclassification.

The form is optional and serves as a request for the IRS to assess an employee using specific criteria to determine their classification and whether or not you need to withhold money from their check for tax purposes. If you do choose to go through this process, you should do it before onboarding your new hire.

After the IRS reviews your form, you will also know if your worker is protected under the labor laws outlined in the Fair Labor Standards Act.

What is the ABC test?

Thirty-three states currently use the ABC test to prevent employee misclassification with California leading the way. The test assesses specific criteria to determine if a worker should be classified as an employee or an independent contractor. 

To be deemed a contractor, the following criteria must be met:

• Part A: The contractor must be able to complete their work free from control and direction. They must pay for their own materials and set their own schedule.
• Part B: The contractor must provide unique services unlike the daily duties of staff employees.
• Part C: The business must exist at the time the work is completed, the contractor must work for multiple companies, and they shouldn’t be arbitrarily assigned the title of independent contractor.

What is the difference between an independent contractor and a self-employed worker? 

When a gig worker provides a business with contracted services, the IRS classifies that worker as a self-employed individual. Since they aren’t a staff employee and your working relationship with them only extends as far as the duration of their contract, you don’t owe them: 

• Paid time off
• Employer health care benefits
• Minimum wage
• Employer 401(k) plans
• Employer-paid FICA taxes

Depending on the circumstances, a worker can be classified as a W-2 employee and as a 1099 worker. For instance, an individual who is a full-time employee of a business may also choose to take a side gig as an independent contractor.

Tax implications for businesses with independent contractors

Tax implications are one big difference between W-2 employees and independent contractors. Businesses aren’t responsible for paying their independent contractors’ FICA taxes. However, you are responsible for backup withholding if they fail to provide a valid TIN.

 What is the IRS classification for an independent contractor?

The IRS classifies an independent contractor as anyone who:

• Is self-employed
• Has the right to control what work will be done and how
• Provides services to other businesses

For example, a business owner who works for other businesses is an independent contractor. Otherwise, you have to determine if they are classified as an employee, a statutory employee, or a government worker. You can refer to the IRS for determining factors.

Do you need to collect backup withholding from an independent contractor? 

You only need to collect backup withholding if you did not receive a valid TIN from your contractor. 

• Reminder: If you fail to send in a 1099-NEC with the correct independent contractor’s TIN, you will be responsible for covering their backup withholding taxes—24% of their income. 

An experienced independent contractor will likely be aware of these tax implications and guidelines, but if they have questions, see an overview below.

Best practices for hiring an independent contractor

Below we’ll cover best practices for hiring an independent contractor. Remember that the rules surrounding hiring contractors vary by state, so be sure you check employment laws for your state before you enter into a contract with an independent contractor

Discuss how both parties prefer to communicate and how often

Nail down a communication plan that works for both of you. Some contractors communicate in a timely manner, while others let time go by without touching base. 

It’s also a good idea to follow up all phone calls with a form of written communication like text or email. Leaving a paper trail can be helpful in case of a verbal miscommunication

Make your project specifications clear

When you create the contractor's agreement, provide specific details about the job that the contractor is expected to perform. This is a good time to ask their legal counsel or upper management to review the scope of work. By doing this, you eliminate any potential confusion later on. 

Ensure the work is a good fit for a subcontractor

Independent contractors can be an extremely helpful asset to your business, providing expertise without the commitment that a full-time employee requires. You can avoid paying their partial FICA taxes, providing health insurance, and a 401(k). This translates to more profit for you and less liability. 

Keep a paper trail of payments and agreements

Once you have your ideal independent contractor picked out, keep track of payments during their time with you. This can be done using bookkeeping software. Then when it’s time to create their 1099-NEC, you have all the information you need for both the IRS and your contractor. 

QuickBooks offers 1099 e-filing services with QuickBooks Payroll¹ and QuickBooks Contractor Payments. When you use QuickBooks Payroll or Contractor Payments with QuickBooks Online, payroll and contractor payments are automatically categorized. Your 1099s will also be automatically generated and e-filed for you, saving your time and helping you prepare for tax season. Managing independent contractors with QuickBooks.

It’s important to keep staff and contractor payments separate because your employment relationship differs, and your obligations to both employment types will vary. 

Quickbooks helps business owners like you manage vendors and gig workers by keeping your expenses and contractor payments organized. We can also assist you with e-filing Form 1099-MISC and other tax forms. Not to mention, your contractors will love our next-day direct deposit feature!²

QuickBook Online Payroll & Contractor Payments: Money movement services are provided by Intuit Payments Inc., licensed as a Money Transmitter by the New York State Department of Financial Services, subject to eligibility criteria, credit and application approval. For more information about Intuit Payments Inc.’s money transmission licenses, please visit https://www.intuit.com/legal/licenses/payment-licenses/.

1. Additional fees apply.

2. Unlimited 1099s: 1099s are e-filed only for the current filing year and for payments recorded in the system. Excludes amendment.