Hiring an independent contractor can be a confusing and daunting process for many companies. There are so many pros and cons, plus you may also be wondering whether or not you should hire a full-time employee instead of an independent contractor.
It’s important that you understand that there is a distinction between hiring someone as an employee and as a contractor because the differences are are many, ranging from paying taxes to providing benefits.
This post will explain what you need to know about hiring independent contractors for your business.
You need to understand the tax implications of hiring contractors versus employees. There are certainly benefits to this approach because you won’t be required to pay any taxes whatsoever for the contractor.
Paying taxes and any other expenses is completely the responsibility of the contractor who must file their taxes as a self-employed contractor or even a business depending on what business structure they’re operating under.
You need to make sure you keep detailed invoices of all payments you make to contractors. The fact that your tax obligations are less means that there is a greater chance of an audit. So make sure invoices are kept for each contractor on every job that they complete.
Some countries and states may even require you to submit all records of payments made using a special form specifically for contractor payments.
Unlike with an employee, a contractor is solely responsible for their own business expenses whether it’s equipment to complete the job or anything else. You are under no legal obligation to provide any equipment for the job to be completed.
A contract is a must-have requirement. You need to explicitly list out what the roles and responsibilities of the contractor are as part of an independent working agreement with your company.
You need to make sure that your responsibilities are also detailed and listed out in the contract. Include the specific types of projects the contractor is expected to work on and when they’ll be finished. If it’s an ongoing relationship then make sure it’s listed out what jobs they’ll be required to do and not do each month.
Having an independent contractor agreement written up is also very important come tax time because you have written proof that the person in question is an independent contractor rather than an employee, which can spare you many headaches.
Independent contractors are allowed to work on different projects for other companies. Unlike with employees where you can create such an agreement whereby this is prohibited, with an independent contractor, you have no such rights.
In fact, it’s quite common for independent contractors to work for multiple companies on multiple projects at the same time.
No Fixed Work Length
You can hire a contractor for as long as you see fit. If you want to hire a contractor specifically for a one-off project you can. However, you can also hire them on an ongoing basis to work with your company. An example would be hiring a marketing company that runs monthly Facebook advertising campaigns for a business.
In this case, you’d want a legal agreement that states it’s an ongoing working relationship rather than a fixed, one-off project.
You’re not required to pay any kind of employee benefits to the contractor such as sick leave, annual leave, superannuation, etc. It’s up to them to cover themselves financially in those areas.
They Charge More
Independent contractors will generally charge a higher fee per project simply because they aren’t getting those benefits that come with employee status. They need a way to cover themselves financially so expect them to cost more per hour or project compared to an employee of your company.
Know The Jurisdiction You’re Operating Under
The facts are that while there are broad rules and regulations hiring and using independent contractors, it’s often a case that each state will have its own jurisdiction.
This is especially true in large countries like the United States so make sure you understand what your legal responsibilities and obligations are for the state and country you operate in before hiring any independent contractors.
You May Need an NDA
If the contractor you’re hiring is going to be privy to information that you consider to be sensitive and/or confidential then it may be a good idea to get a custom NDA created. This way the contractor cannot spill the secrets of your business publicly without facing severe legal ramifications and you get peace of mind knowing your secrets are protected.
Hiring contractors is a great way to go for many companies, but you need to know that the process and both parties’ obligations are not the same as when you hire an employee. It’s a very important distinction to remember.
If you’re unsure about any of the above or, if you’d like some professional legal documentation created for hiring contractors, then get in touch with us today.