Hiring independent contractors (ICs) is different from recruiting full-time employees. They’re not going to require benefits contributions, and they may well be working remotely. This means hiring them involves a certain set of processes that you need to streamline. Follow these tips to cover all the bases so you can bring on contractors smoothly.
1. Determine if the person is a legitimate contractor
Just because a person has listed himself as an independent contractor doesn’t necessarily mean he classifies as one under the local law. Before making a hiring decision, make sure you’re getting into an independent relationship with a potential contractor.
You can take the IRS’ 20-Factor test to gain an overview of an independent contractor relationship. And if you’re still not certain whether an individual is an IC or an employee, you can request that the IRS examines your case by filing Form SS-8. The IRS will perform an analysis and give an official verdict on the person’s status. The wait time is six months, but that’s nothing compared to the time you’ll waste by misclassifying a potential worker.
Pro tip: If you’re planning to hire foreign contractors, make sure to read up on local laws of their countries. Some countries, like the Netherlands, require ICs to obtain an exception from the tax authorities. Before hiring, discuss the official status of a potential contractor to know whether or not they comply with their country’s law and contractor requirements.
2. Collect relevant forms
The next step is to request forms that are required by the tax authorities. These vary depending on where the contractor is based and how much they will earn. Here’s a look at the most commonly used forms for ICs.
Form W-9 – for U.S. contractors
The IRS requires ICs to fill out Form W-9, which is used to request the TIN (Taxpayer Identification Number) of the contractor. The TIN should be either an Employer Identification Number or a Social Security Number. The contractor will file his own self-employment taxes, but you still need to collect and submit the W-9 to the tax authority.
W-8BEN – for foreign contractors
Collect this form if your IC is not a U.S. citizen. The information listed on the W-8BEN will determine your obligation regarding tax filing and reporting. The form is valid for three years and has to be renewed if the contractor continues working for your company beyond that point.
Form 1099-MISC – for contractors earning more than $600
If the IC will earn $600 or more for the work delivered in a year, you must ask them to fill out Form 1099-MISC. Collect it before January 31 because that’s the due date in the IRS’s book. E-delivery is an option, but you must have informed the recipient that their form is ready via email.
Form 1099-NEC – for tax reporting in 2020
It’s also worth mentioning that the IRS has re-introduced Form 1099-NEC for reporting non-employee compensations. This covers payments that meet the following conditions: 1) it is made to a person who isn’t your employee 2) it is credited for services provided in the course of your business 3) it is done to an individual, entity, or partnership 4) the whole amount for the year is equal to or above $600.
3. Make a contract
Once you’ve collected the forms, it’s time to put pen to paper. Make a contractual agreement that outlines the scope of work, fee, the date for deliverables and expected results. The agreement should also include:
- Non-disclosure terms – safeguards your confidential information
- Payment terms – dictates the frequency and mode of payments
- Dispute resolution clause – explains how potential disputes will be resolved
- Tax obligations – states that you will not withhold or cover benefits contributions or taxes
- Ownership of work – conveys that the business will own the end product
- Non-compete clause (optional) – prevents the contactor from offering services to your competitors
Pro tip: Reduce friction in your hiring process by allowing your independent contractors to sign electronically. It’s convenient for ICs and less demanding on your administrative personnel. You can do this with the help of DocuSign or another electronic signature service.
4. Avoid IC pet peeves
You should, of course, treat your ICs with respect. This involves avoiding the following actions that are known to rankle the IC crowd:
- Specifying work methods – You can request a status update on an ongoing project, but steer clear of asking them to adopt a specific work method. ICs tend to hate this.
- Paying a flat amount consistently – You might have agreed to terms with the contractor, but ongoing flat payments may turn your ICs into what appears to be employees and you could run afoul of the law.
- Burdening the IC with too much work – Ensure that you don’t pile on so much work that your contractors are unable to take care of their health or other priorities.
Avoiding all these things will show that you have a healthy respect for independent contractors. It may even boost your employer branding as ICs respect companies that look after their needs—and word can travel (especially with social media).
Independent contractors offer skill and expertise when you need them. As such, you should be strategic and forward-planning about how you recruit them. Follow the tips above to streamline your recruitment drive and hire the most suitable people for your ongoing projects or business expansion.
If you’re struggling to keep pace with the demands of hiring and onboarding employees and contractors, outsource it to the experts at PrincePerelson. We are known for our long-standing networks in a wide variety of Utah industries and our track record of filling positions quickly. Whether you need assistance finding talent for technology, engineering, sales, marketing, or anything in between – we are here as a resource for you!