Independent contractors make the world go round. Seriously, we use contractors for MOST work. If you are a business owner or entrepreneur, independent contractors are your best friend.
But there are some things you should consider before hiring one:
- What’s the difference between an independent contractor (1099) and an employee?
- What forms and paperwork do you need to hire someone for a job?
- How do you pay them?
- How do taxes work when you hire a 1099 worker?
Don’t let these questions intimidate you. I’ve got answers! Read on and find out more about what it means to hire someone as an independent contractor.
Understand The Difference Between Hiring An Employee And An Independent Contractor
Let me make it simple. When you hire a company to do a job for you, they are an independent contractor.
If you hire a person to do a job for you – they are an IC
If a person does regular, full-time work for you and no one else, they need to be hired as a W-2 employee.
According to the Internal Revenue Service (IRS), a worker is an employee if:
- The company controls what work is done and how it’s done.
- The person works full time for the business.
- The worker doesn’t own a significant part of the business, such as stock or other financial interest in the company.
A worker is considered an independent contractor if:
- The company doesn’t control what work is done or how it’s done but only the result of the work
- The person isn’t full time; for instance, the worker has another job with another business
Contractors and employees are clear distinctions in the workforce, with different rights. Some of their differences come down to how much control you have over them. The IRS uses three categories:
- behavioral control (do they decide what work is done when?).
- financial control (who decides payment terms?)
- Type of relationship – employment agreement or contract length both help determine if someone’s a contractor or not.
Form W-9 for Independent Contractors
The most important form is the W-9 form. This form tells the IRS that you paid a contractor for work, so you don’t have to pay taxes on that money.
By having the contractor fill out a W-9 form you are telling the IRS to tax them, instead of you.
It’s a very simple form that can be found here.
YOU SHOULD NOT PAY TAXES ON WAGES YOU PAY TO A CONTRACTOR. This is why we get a W-9 every time.
Paperwork For An Independent Contractor
It is vital that you set up a written service agreement with your independent contractor. This will establish the terms of their work, and outline what they will be paid for their service as well as how often they’ll be paid.
You can download my service agreement here. Use the code “idontwannapayyou” to download it for free.
You should also draw up an NDA or non-disclosure agreement to protect yourself from any potential liabilities arising from information that is leaked by your worker during his time in employment with you. This is optional but some choose to do it.
You can download my NDA if you don’t have one here. Use the code “idontwannapayyou” to get it for free.
If it’s not clear who will pay for things like health insurance, mileage expenses, or other costs associated with doing business, make sure to clarify these points before signing on someone new.
As you’re going through the hiring process, remember these three key points:
- Be sure your orders/needs are clear and understood
- Make sure everyone knows where the finish line is
- Write it all down on a service agreement so everyone is on the same page
Paying an Independent Contractor
One of the most important considerations to take into account when hiring an independent contractor is how you will pay them. There are two common methods: paying by the job or an hourly wage.
Paying by the job is just what it sounds like. You pay for the entire job, upfront or half and half.
Hourly wages are a flat rate for the amount of time it takes to complete a task.
Both methods have pros and cons and are usually set by the contractor.
It’s important to be clear and upfront about what you’re going to pay, before hiring an independent contractor; this will prevent any miscommunications later on down the line.
Use my service agreement to outline your expectations clearly.
Independent Contractors and Tax Reporting
You need to keep track of payments made during the calendar year for individual contractors who are paid more than $600 per year in total.
Any amount paid above $600 will require that you fill out and collect a W-9 form from the contractor. NO EXCEPTIONS!
Here is how I do it.
If they are going to be paid more than $600 in a year I collect a W-9 right away. I put the signed W-9 in a folder for my bookkeeper and it gets reported to the IRS at the end of the year.
Keep it as simple as possible.
Conclusion
Now we know how to hire contractors.
We know what forms we need and how to report them on our taxes.
If you have the chance to hire someone as a 1099 independent contractor instead of a full-time employee, do it. It’s cheaper, easier and more efficient.
Contractors are responsible for their own insurance, benefits, and taxes. That means you don’t have to deal with any of it.
Remember, good documentation will save you. Get a service agreement and NDA in place.
Always pay your workers on time, show fairness and be kind.
If you like learning from me and want to learn more about business, check out Vanader Business School.
-Evan
