Independent Contractor

At some point in your business you’ll likely hire people here and there for help – a website designer to put together your site, a graphic designer to do a logo and/or other branding for you, and/or a virtual assistant to help you with administrative tasks. Because these typically happen early on in a business, a LOT of entrepreneurs forget this is actually a serious business transaction where you need to think about a lot more than just how much it will cost to hire them. So what are some of the MUST haves?

Here are my top 3 tips for hiring contractors:

  1. You need an Independent Contractor Agreement

First of all – what is an independent contractor? A person you are hiring to perform a service for you, who is not an employee or otherwise associated with your business. Typically, these people have their own businesses (think website designer or VA), and you are one of their numerous clients they perform similar services for. Because they are contractors, you as the client do not have a say in things like where they work, the hours they work, you aren’t responsible for training them, etc. While these are all important things in a employer-employee relationship, they can’t be part of a contractor-client relationship.

Why do I need an agreement? While state laws vary slightly, the overall consensus is that you NEED to define this relationship so these people do not qualify as employees in your business. If this is not done right, and this person qualifies as an employee, this could be catastrophic for your new biz! Employees require payroll, workers’ compensation insurance, and potentially benefits and other savings plans. Not mapping this out ahead of time could put you in hot water with the Department of Labor if you aren’t careful. This agreement needs to be clear on the contractor relationship, and you must make sure you’re not treating them as an employee.

In addition to this extremely important piece, the independent contractor agreement will also make sure YOU keep all the intellectual property rights to the work they create for you, outline what you’re getting and how much you’re paying the contracting, and ensuring any disputes in the relationship are resolved where YOU live, not them.

  1. Only sign ONE document between the two of you

This is a point of confusion I see a LOT: one contract is good…so two must be better, right? NO!!!

When both you and the contractor have contracts, and  you each just sign each other’s you are not just doubly protecting yourself. You’re actually negating BOTH contracts and ending up with nothing.

Why?

Because these two agreements are likely contradictory to each other. They’ll say slightly different terms, use different language, and discuss different things. So when it comes time to actually look at what you and this person agreed to, which contract controls? Which one do you have to abide by? If there are two…this doesn’t work.

THE SOLUTION: Always have them sign YOUR agreement (which you will have drafted by an attorney, updated, and ready to go!) You are hiring them, so you get to be the one in control of the relationship. If they refuse and want to require you sign theirs, look at both agreements and see where the discrepancies are. You should consult with an attorney here if possible as well, to make sure you understand the differences. Often times their agreement will put the bulk of the liability or responsibility on YOU, and yours them, so it’s important to know what you’re actually signing! You can then negotiate the terms, and merge the two documents to create ONE agreement that will act as the legal agreement for the relationship.

Is it tedious and potentially more work than you’d like? Yes. Will you be thanking yourself a million times over if something goes wrong and you know you can depend on a legitimate agreement to protect you. A MILLION TIMES YES. Just trust me. Don’t skip this step.

  1. 1099 Tax Form

In the United States, anytime you pay someone over $600 in your business to perform a service, you must send them an IRS 1099 tax form at the end of the fiscal year, showing the amount you paid them, and whether any taxes were deducted from the costs. (They won’t be if you properly worked with them as an independent contractor, as you aren’t required to remove taxes for them, you simply pay their invoice.)

EXCEPTIONS: There are couple situations where you wouldn’t need to send contractors 1099 forms, and although it wouldn’t hurt if you accidentally sent a 1099 form to someone when they didn’t need one, it’s important to know when this applies!

Hiring through a third-party service: if you use a third-party service like Upwork to hire your contractors, technically you’re working through them, and they are doing the hiring. They will likely be responsible for sending the contractor their 1099 form, so you don’t need to worry about it in this instance (though you’ll still want to double check, to make sure they are complying!)

Hiring C or S-Corporations: although it’s pretty rare, if the contractor you’re hiring is a C or S-corporation, you don’t need to send them a 1099 form.

BEST PRACTICES: When you hire a contractor, send them a W-9 form to fill out, which will include all applicable business information, including their Tax ID number, business name and entity, address, etc. which is the information you’ll need to send their 1099 form at the end of the year. Keep this in a safe place, and when it comes time for taxes, you’ll easily be able to remember who you hired, and send them 1099 forms on time.

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