When you own or manage a small business, you often encounter budgetary constraints surrounding the hiring of new employees. One way to get around those constraints is to use independent contractors. Before you do, keep in mind the following four important points about using independent contractors.
Your Relationship Will Be Different
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When establishing a relationship with independent contractors, remember that you have no control over how they do the work, as long as they offer the result you agreed upon in your contract.
Communication is critical: You need to agree upon suggested deadlines, discuss timelines, and keep each other updated about expectations. You may not control their schedule or their right to work with anyone else, but you can control how well or poorly your working relationship goes.
Your Contracts Need to Be Specific
Your contract needs to outline the details of your working relationship. Some of the many areas you should consider include: how long the job will last, how and when you'll deliver payment, how much you'll pay, and how any intellectual property rights affect the work performed.
Be especially clear about this last point if you're working with writers or artists, but expect the writers and artists to charge a higher rate if you want to buy the exclusive rights to their work.
You Must Prove They Are Not Employees
Just because you state that your independent contractors are not employees, the IRS won't be satisfied by word alone. Your working relationship with these contractors needs to fit within certain guidelines for them to be considered independent contractors.
- Work Control: Independent contractors aren't your employees, which means your business shouldn't require them to come into the office. You should let them set their own schedules. If you need independent contractors to adhere to company policies, that requirement could be something that will make contract workers seem like employees.
- Payment: Independent contractors are usually paid by the job or by an hourly rate. Employees receive salaries.
- Working Relationship: Independent contractors are self-employed, which means you aren't requiring them to work solely for you. If you do, the issue over whether they're independent contractors or employees becomes thornier.
You Must Provide Tax Form 1099-MISC
By the end of January each year, you need to give your independent contractors Form 1099-MISC if you paid them more than $600 over the course of the previous year. Use an online 1099 form kit to make completing this paperwork and delivering it to your contractors easier. Find one that links with your current accounting software, such as QuickBooks, so that you don't spend too much time inputting data.
Independent contractors can be a major asset to your business when you need to get jobs done but you don't need a full-time employee to accomplish them. They give you the financial freedom to do specific and customized tasks. As long as you remember the differences between an independent contractor and an employee, you'll be able to hire these workers as a great benefit to your business.