Most businesses these days have worked with an independent contractor. You’re likely to increasingly work with contractors, as they’re expected to be 40% of the workforce by 2020!
Run payroll and benefits with Gusto
As a company, working with independent contractors can be great for several reasons, like:
- Lower overall costs: Contractors run their own business, so they are responsible for their own HR/admin functions (like paying their own taxes or buying insurance).
- Temporary relationship: Maybe you need some help redesigning your website, but don’t need a full-time designer. This is perfect work for a contractor, who you only pay for a specific project.
- Less oversight: Ideally, the contractor is an expert in the project you’re having them work on. That means you can trust them to use their expertise to provide a great end product, rather than driving the process yourself.
However, there are still some requirements you need to follow when working with a contractor. Let’s go over what these must-dos are so you don’t find yourself in trouble.
Must-do #1: Get a W-9 (or W8-BEN)
A Form W-9 (Request for Taxpayer Identification Number) lets you know that the individual is legally allowed to work in the US, if they are a US resident or citizen. This is an absolute requirement; otherwise, you could be on the hook for illegally hiring labor.
Must-do #2: Get a signed agreement
A mutually signed agreement will lay out the scope of the project, the compensation structure, who owns the product and intellectual property at the end, and other similar items. Although it’s not absolutely necessary, the contract protects both parties. As a company, you don’t want the contractor coming back and claiming that you owe them more money, or that they own the product you paid them to produce.
Since the “employee vs. contractor” misclassification debate is a hot one right now, you should be aware that simply having a contract which says “independent contractor” doesn’t automatically make that person a contractor. Here are some tips on how to write an effective contractor agreement [pdf] and how to gauge whether they’re a contractor or employee.
Must-do #3: Keep adequate records
Just like you have to keep adequate records of employee payroll and other business expenses, you’ll have to keep adequate records of anything related to contractors. This includes the contract itself, any invoices, plus proof of payment (if not electronic).
Must-do #4: Issue a 1099 at the end of the year
Generally, you’ll need to issue a Form 1099-MISC to any contractors to whom you paid more than $600 throughout the year. These must be sent out to contractors by January 31st (or the following Monday, if Jan 31st is a weekend). You’ll then need to submit a copy to the IRS by the end of February.