5 Things You Need to Know About Independent Contractors

Independent contractors (ICs), many of whom consider themselves freelancers or consultants, are booming across many industries. ICs can be beneficial additions if your business is picking up steam, especially if your company seeks to expand its workforce without taking on more full-time employees. For instance, if your business needs a website that requires ongoing maintenance, you might hire an IC to take on the job. In this circumstance, the odds are that you would save a considerable amount of money by not hiring an in-house employee.

There are numerous benefits to hiring independent contractors, but there are also many details to be aware of when hiring one. If you are leaning toward hiring an IC, here are five things you need to consider to keep your business—and legal standing—in the right direction.

1. Independent Contractor Vs. Employee

Correctly classifying a worker as an independent contractor or an employee is essential. The determination of someone operating as an IC vs. an employee can be a fine line that changes on a case-by-case basis. To help employers determine how to classify a new hire, the IRS uses a 20-factor test to determine if someone is an independent contractor. A hire would be classified as an employee if he or she meets at least 10 of the criteria as an employee. According to the IRS, “The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.”

2. The Importance of Properly Classifying Independent Contractors

Federal and state tax agencies are inclined to confirm reported employment services. Unfortunately, this means that businesses who hire independent contractors are much more likely to find themselves being audited. From the government’s standpoint, more employees equate to a more reliable tax source, which is collected by the employer throughout the year. An IC, on the other hand, must pay taxes on their own, which can cause confusion and irregular payment schedules.

Prior to contracting the services of an IC, a good safety measure is to obtain documentation that declares their self-employed status. Consider doing this through the use of a contract for your new IC to sign. Just remember to treat your new IC like a contractor, and not like an employee, in accordance with the aforementioned IRS test.

Employers typically won’t pay or withhold any taxes on payments to ICs. Even though you may not deduct taxes from your new IC’s check, you may need to file Form 1099-MISC if you pay your IC more than $600 a year for his or her services. Be cautious with distinguishing someone as an independent contractor, because employee misclassifications can create hefty penalties for employers. 

3. The Benefits of Using an Independent Contractor

There are many substantial benefits and freedoms when it comes to hiring an IC.

  • Financial Savings: Independent contractors will often cost more per hour than employees. But at the end of the day, that number will never come close to someone on salary. Additionally, by hiring ICs, employers avoid the cost of Social Security and Medicare taxes, unemployment insurance and workers’ compensation insurance, as these costs are paid by the IC him- or herself.
  • Less Equipment: Whether it be computers or office supplies, it is standard for ICs to provide their own equipment. This may vary by industry, however, and how specialized your particular business is.
  • Less Office Space: Most ICs prefer to work out of their own offices or homes. Therefore employers can save on cost per square foot.
  • No Training Required: The idea with ICs is that they are specialists in their fields. So when using an IC, you avoid the costs and time associated with training.
  • Freedom With Staffing: Many businesses have varying workloads, meaning that there will be various types of projects from time to time. Therefore, rather than having to unnecessarily keep employees around, employers are free to scale their workforce up and down according to demand.

4. Proceed With Caution

As a business owner, you always want to protect yourself and be mindful of any possible consequences from your choices, good or bad. Although you may know your business’ rights and obligations with respect to employees, there are some different precautions to take when it comes to independent contractors:

  • Intellectual Property: No matter what your field, it’s important to take ownership of intellectual property into account. Some ICs, particularly writers and artists, may not be keen on releasing rights to their work. Therefore, in the contracting process, always define which party will possess ownership.
  • Workplace Safety: In general, it’s a good idea to make sure your office is as injury-proof as possible. When it comes to ICs, however, take the protector mentality to the next level. As ICs are not covered by your workers’ compensation plan, they may be able to sue if an injury takes place on the job.
  • Lack of Control: Unlike employees, independent contractors have the freedom to work for multiple parties. Therefore, the employer won’t have full control over the consultant’s work and schedule. The best way to safeguard your investment is to obtain quality referrals and implement suggested deadlines.

5. How to Find and Hire an Independent Contractor

If you are on the prowl for a local IC who can be available in person, there are a few ways you can approach this:

  • Placement Agencies: Since they have already sifted through applications from many job seekers, these agencies can act as your human resources department. The downside of this route is that placement agencies charge a fixed percentage or fee for each person hired.
  • Reach Out to Other Professionals In Your Industry: This is a great way to find referrals to ICs that other businesses have had success with. This also includes referrals from other ICs that you have a relationship with.
  • Post Jobs On Your Website: In addition to your website’s natural traffic, you should share the link to social networking sites such as Linkedin and Facebook.

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