A relationship with an independent contractor can be beneficial for your business as well as the person receiving services. Since he or she is not an employee, you’re not required to pay health insurance, vacation time, or contribute towards unemployment insurance. You also don’t have the large cost associated with recruiting, hiring, training, and retaining a full-time employee.
The independent contractor has greater flexibility, can work on several projects at once, pays his or her own overhead, and can often command a higher wage due to not receiving benefits. He or she remits federal and state taxes quarterly as well as pays both the employer and employee portion of social security and Medicare when completing the annual tax return.
This isn’t to say that working with independent contractors doesn’t present challenges. First, you must ensure that the person meets the Internal Revenue Service (IRS) definition of independent contractor. You also need to determine contract terms and how to pay for completed work. We discuss each of these issues below.
Misclassifying Employees as Independent Contractors Could Cost You
Sometimes employers classify workers as independent contractors when they should be employees. Whether it’s an honest mistake or a deliberate attempt to avoid paying benefits and payroll taxes, the IRS may impose a fine or other sanctions for every person you misclassify. Each person you classify as an independent contractor must meet each of these qualifications:
- You don’t directly control the hours worked or direction of the work beyond providing initial instructions and clarification.
- The person is self-employed and may provide services to multiple companies at the same time. The nature of the independent contractor’s work aligns with the services your company provides or needs.
- The work performed by the independent contractor is outside of the usual scope of duties for your employees.
You must provide Form 1099, a miscellaneous income statement, to all independent contractors who earned more than $600 in a calendar year. Before you can do so, you must apply for an employer identification number (EIN) if you don’t have one yet and ask the worker to complete a W-9 form. This provides his or her name, contact information, and social security number to allow you to remit the 1099 to the IRS and the independent contractor by January 31 of the following year.
Contract and Payment Terms to Consider
Preparing a contract and discussing terms with the independent contractor before work commences is the best way to ensure you’re both on the same page. It also provides a document to refer to should disagreements arise later. Here are some things to consider including:
- What if the work doesn’t meet your standards?
- When is the project due? Should the independent contractor turn in everything at once or incrementally as completed?
- What should the worker do if he or she can’t meet a deadline?
- How much can the independent contractor expect to earn? Will you pay by the project, by the hour, or another method?
- Can the independent contractor hire sub-contractors to help complete the project?
Since non-employees aren’t on your payroll, figuring out how to get money to them is sometimes challenging. At Palmetto Payroll, we offer many innovative solutions to this common issue. We invite you to contact us today to learn how to make paying your independent contractors as seamless as possible.