More businesses than ever are relying on independent contractors to complete projects, expand their reach, and keep up with the competition. But if your company has only ever hired W-2 employees, how do you know if it’s the right time to hire your first independent contractor? And more importantly, what are the steps you’ll need to find and hire your first contractor?
Before diving into hiring your first contractor, it’s important to understand the legal and tax-related nuances between how 1099 contractors and W-2 employees are classified.
What are independent contractors?
With the number of gig workers expected to rise to 78 million worldwide in 2023 and 39% of all American workers already working freelance, the future looks bright for companies hiring independent contractors. However, independent contractors—also known as 1099 contractors—differ from W-2 employees in six key categories:
- Investments by the worker and company
- Nature and degree of control
- Opportunity for profit or loss
- Degree of permanence
- Importance of the work to the employer’s business
- Skill and initiative
Contractors are technically considered “self-employed,” which means that their earnings are subject to self-employment tax. To ensure both your business and your workforce are compliant with tax regulations, it’s crucial to correctly classify each worker. To find out more about the six ways contractors differ from employees, read this blog post.
What are W-2 and 1099 tax forms?
The terms ‘W-2’ and ‘1099’ apply to the different forms your workers will need depending on how they’re classified. W-2 tax forms are for permanent employees, and 1099 tax forms are for independent contractors and other freelance workers.
The W-2 tax form is for an hourly or salaried employee paid through their company’s payroll and has their payroll taxes withheld throughout the year. However, the 1099 tax form is for independent contractors who are paid for specific services. Self-employed, they tend to complete projects and can often offer their services to multiple companies.
Misclassifying an employee as a contractor could lead to investigations into a company’s payroll and compensation lawsuits. It’s important to consult a legal professional to ensure that a worker is not being classified under the wrong title.
7 steps to hire an independent contractor
1. Determine the need for an independent contractor
There are several benefits of hiring contractors: not only can they be more cost-effective for certain jobs or tasks, but they can also bring expanded or unique skill sets to your organization that you may not already have on your team.
When you’re looking to grow your team or expand your team’s capabilities but don’t have the budget to hire a group of full-time W-2 workers, contractors may be a cost-effective and creative solution.
Before hiring an independent contractor, ask yourself the following questions:
- What skill and experience level are you looking for?
- What is the cost-savings benefit of hiring contractors vs. full-time W-2 workers?
- What time frame will you need the contractor(s) for?
- What will differentiate contractors from current W-2 employees?
It’s important to consider these things before hiring. Being certain of the roles you expect independent contractors to fill—and how these decision will impact your budget—will make it much easier to hire the right contractors for you and justify this decision to other company stakeholders.
2. Source talent
Once you’ve determined exactly what you require from a contractor, you can begin your search. There are a number of platforms and agencies for finding contractors for specific industries. For example, platforms such as LinkedIn, Fiverr, and Upwork are great for sourcing creative talent such as freelance designers or creators. On these platforms you can look through portfolios that freelancers have already completed for other companies and get an idea of the kind of work they can create. You can use these platforms to contact workers and discuss the details of what the requirements are for your project and find out what each person can offer.
3. Confirm the worker’s classification and file the right documentation
After settling on the right contractor(s) for your company, it’s also important to double check that each person meets the specific classifications of an independent contractor as outlined above. Consider how much autonomy they will have outside of your company, as this is one of the main areas where employees are wrongly classified as independent contractors.
The Department of Labor (DOL) has recently discussed potential changes in how independent contractors are classified, so keeping up with the latest legislation is also vitally important. Again, consult with a legal professional to check that the worker you’d like to hire meets all the classifications to be an independent contractor.
4. Draft an independent contractor agreement
Once you’ve ensured that the workers you would like to hire meet all the classifications of independent contractors, it’s time to draft an agreement between each worker and your company. These agreements should detail the expectations you both have of the working relationship, including:
- Details of payment
- Start dates
- The work that is to be completed for the project
Any work that is completed by a contractor for your company should belong to the company and not the worker, so remember to include the terms of intellectual property rights as well as any confidentiality or non-disclosure agreements that may be necessary.
5. Collect and send necessary tax forms
Unlike W-2 employees of a company, independent contractors are responsible for filing their own taxes because they are classified as self-employed. For this reason, if your company is paying the contractor more than $600 for completed work, it’s essential that you obtain a W-9 tax form from them. Keep the contractor’s W-9 form in a safe place so that you can easily give all the details of any payments made when it is required of you.
While independent contractors typically pay their own taxes, you may still be required to pay federal unemployment taxes (FUTA) and state unemployment taxes (SUTA) on their behalf. Consult a legal and/or tax professional to discern whether you are responsible for these fees for your specific independent contractor, and follow their advice.
6. Stay up to date on independent contractor laws
While independent contractors do not have the same employment rights as W-2 employees, they are still protected by state and federal laws with regard to overtime payments and minimum wage requirements. It’s imperative that the needs of these laws are met in order for the contractor agreement to be legally viable and for the contractor to complete your work.
7. Set up a payments process
Independent contractors can be paid in a variety of ways, from direct bank transfer and payroll to paying them in cash. Being able to pay a contractor quickly and efficiently will make them more likely to want to work for you, so it’s important to have the details of how you’re going to pay them figured out before you hire them. Making contractors feel valued in the relationship they have with your company will help to build loyalty, making hiring easier in the long term and benefitting your company’s projects in the present as well as in the future.
Paying contractors doesn’t have to be complicated, even if your company employs both W-2 and 1099 workers. Branch specializes in streamlining payroll as shown in this case study of a client who went digital and eliminated outdated payment processes for both their W-2 workforce and 1099 contractors. If you’re looking to seamlessly pay all of your workers, employees, and contractors alike, quickly and for free, Branch is here to help.
Be part of the future of work and hire an independent contractor today!
Regardless of industry, hiring and retaining independent contractors are two separate stories. With more choices of where to work than ever before, building loyalty with 1099 contractors is crucial. Instant payments through Branch can help you unlock the keys to both hiring and retention when it comes to your 1099 workforce.
*The information provided on this website does not, and is not intended to, constitute legal nor tax advice; instead, all information, content, and materials available on this site are for general informational purposes only.