Basics of hiring and managing independent contractors

If you’re hiring for a project, either personally or individually, you need an independent contractor. Independent contractors can span the gamut from plumbers to bookkeepers. Some businesses hire only independent contractors. Some businesses hire a mix. But it’s important to understand the differences between an independent contractor and an employee, as well as the benefits that you can gain from each.

Start your Tax ID (EIN) Application

What is an Independent Contractor?

An independent contractor is an individual or business you contract for professional services. Examples of independent contractors in daily life include: gardeners, childcare professionals, construction companies, and maid services. They aren’t employees because you don’t have a continued, long-term relationship with them, and you don’t control the way they do business. Instead, you ask them to perform a specific task or project, and it’s up to them to complete it.

You don’t have direct control over an independent contractor: you don’t conduct performance reviews, ask them to come in on time, or critique their performance while at work. As a trade off, you don’t need to pay benefits or taxes on their behalf, and you can sever the relationship at any time.

How Do You Hire an Independent Contractor?

To hire an independent contractor, you will need to have them fill out a form known as a W9. This W9 form is going to include their legal name, mailing address, and social security number. It’s a requirement to collect either social security numbers or EIN numbers of those you hire in this way.

At the end of the year, you will send each independent contractor a tax document called a 1099. The tax document simply outlines how much you have paid the individual during that calendar year. The individual will pay their own taxes based on this amount. 1099s need to be sent out in a timely fashion after the year-end, so that individuals can file their own taxes.

Anyone can hire an independent contractor: either an individual or a business. However, if you are a business, you will need an EIN to put on your 1099 forms. Your 1099 forms will include your name, mailing address, and either your personal SSN or your EIN.

What’s the Difference Between an Employee and an Independent Contractor?

It’s important to thoroughly understand the differences between employees and independent contractors. Often, business owners will unintentionally label employees as independent contractors. This gets them in trouble with the IRS: significant trouble. There are substantial fines and penalties involved in misclassifying an employee, as well as back taxes that would need to be paid.

However, there’s no strict definition that makes someone an independent contractor. Instead, it’s a combination of things.

An independent contractor fulfills most, though not necessarily all, of the following:

  • Sets their own business hours.
  • Completes their work as they desire.
  • Doesn’t have a promise of continued “employment.”
  • Is able to negotiate their own fees.
  • Works in their own office or home.

Let’s take the case of a transcriptionist. If you send a file to an individual and ask them to transcribe it, under the negotiated price of $500, then you have hired an independent contractor. The transcriptionist will be using their own equipment in their own home to complete the transcription and they will be returning the finished product for a negotiated price. Once the project is completed, the transcriptionist may never be hired again.

If you have someone in your office, on your computer, transcribing documents from 8 AM to 5 PM, on the other hand, that’s more likely to be an employee. The transcriptionist is expected to work at a certain time or place, with the expectation of long-term continued work. If the transcriptionist shows up for work the next day at 8 AM, and no longer has a job, then they may have a case for unemployment.

Why Would You Want to Hire an Independent Contractor?

When you hire an independent contractor, you pay them a flat rate per service provided. That means you don’t need to maintain a relationship with them, and further, you don’t need to cut paychecks and track things like taxes, workers compensation, benefits, and more. Hiring independent contractors (when possible) is nearly universally beneficial, unless you have ongoing need of them.

The Basics of Managing Independent Contractors

Managing an independent contractor is complex, because exerting more influence over how they finish their work can make them an employee rather than an independent contractor. If you want to effectively manage an independent contractor, you must instead focus on their work product:

  • When you want their work delivered by.
  • How you want the work delivered.
  • What condition you want the work.

But you shouldn’t try to control:

  • Where the work is completed (if not relevant).
  • When the work is done (not delivered).
  • Who the work is done by.
  • How the work is done.

In the case of the transcriptionist, you could say that you want a transcription returned in a specific format by next Monday, via email. But you could not tell them they need to complete the transcription work in your office, that they need to be there at specific times, or (often) even that they must do it themselves. You also can’t give them directions on how to do the work, such as which software to use, unless it is relevant to the finished product. Most independent contractors are allowed to sub-contract work out, as long as it is returned to satisfactory standards.

Independent contractors are often remote workers, which can make managing them logistically difficult. Document management systems and employee portals are often used to ensure that independent contractors are able to get the information they need, as well as return their work product. As remote work becomes more popular, independent contractors are also becoming more commonplace. There are many companies today that operate solely with independent contractors.

Many businesses can benefit from hiring independent contractors rather than employees. You just need to do it right, to avoid misclassification. When in doubt, you can call the IRS to find out more about what constitutes an employee.