Independent contractors are a common choice for small business owners, mostly because they believe that dealing with benefits, taxes, and agreements is somehow easier than when hiring a regular employee. The truth is that when hiring an independent contractor, you must still have a contract and of course, there is other paperwork that must be completed and taxes that must be dealt with.
The difference between an independent contractor and a regular employee is that an independent contractor is not under the direct control of the company they are working for. Because of this, payroll taxes and some state and federal employment laws do not apply to them. The following are a few of the things that an employer needs to look out for when hiring an independent contractor.
Correctly Classifying Your Workers
The IRS assumes that a worker is a regular employee unless proven otherwise, therefore it is important to ensure that a worker qualifies as an independent contractor, and if so, is classified as one. This is very important because the repercussions for incorrectly classifying workers can be severe. The IRS has a 20 question test to determine a worker’s classification. The answers to these questions determine if the employer has an obligation to withhold taxes and pay payroll taxes such as FICA and FUTA or not. Misclassifying your workers can cause financial and legal repercussions, so be sure to do it correctly. To learn more about misclassifying your workers, check out Three Payroll Tax Mistakes to Avoid.
New Hire Paperwork
The paperwork for independent contractors is much simpler that for regular employees because only a few documents are needed. It is important to get these documents at the beginning rather than when the work is done and the contractor may be hard to get a hold of. Some of these documents include a W-9 Form, application, resume, and a written contract. It is imperative to keep a contract (signed by both parties) on file at all times. As a business owner you are required to have these documents on hand in case you are audited by the IRS.
Most times before hiring a worker employers check the prospect’s references to make sure that they are a good fit to their company. In this same way, it is always a good idea to check an independent contractor’s credentials before making the decision to hire them. Always make sure they are licensed to work in your state, find out if there are any complaints against that person, and make sure you know if there are any convictions relating their practice.