Independent contractors are a common choice for small business owners, mainly 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, other paperwork 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. Payroll taxes and some state and federal employment laws do not apply to them. The following are a few 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 essential to ensure that a worker qualifies as an independent contractor and is classified as one. This is very important because the repercussions for incorrectly organizing 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 should 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.
New Hire Paperwork
The paperwork for independent contractors is much simpler than that for regular employees because only a few documents are needed. It is crucial to get these documents initially 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 must have these documents on hand if you are audited by the IRS.
Before hiring a worker, employers check the prospect’s references to ensure that they are a good fit for their company. In this same way, it is always a good idea to check an independent contractor’s credentials before deciding 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 to their practice.
If you want to ensure your business stays tax compliant for contractors vs. employees, schedule a demo with us. Dominion has payroll specialist on standby to answer any questions you may have. We also offer automatic tax filing when you do your payroll with us.
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