20 Jul Hiring 1099 Contractors
There’s a lot of confusion when it comes to hiring 1099 contractors or independent contractors. What makes it different from hiring employees?
1099 Contractors play a much-needed role for companies and individuals who don’t have the desire or resources to hire for a full-time position. Independent contractors can be graphic designers, copywriters, photographers, and anything else that businesses need on a contract basis.
Hiring independent contractors can provide a company with a ton of benefits, including it gives you the flexibility to hire a workforce only when you need it. However, it needs to be done right, and not everyone can legally work as 1099. Misclassifying workers can come with a lot of liability.
In this guide, you’ll learn how to decide if you need to hire an IC and tips for ensuring the process flows smoothly.
What Is An Independent Contractor?
An independent contractor is an individual or a business that is hired by a company for a specific task. They should be running their own operations and are free to work without control of their clients outside of the agreed-upon contract, and aren’t an integral part of their client’s business operations.
Benefits of Hiring 1099 Contractors.
There are a number of reasons a company might want to hire an independent contractor:
- Greater flexibility. Hiring an independent contractor gives companies the option of hiring based on workload. You can contract the exact services you need when you need them. For example, you can hire a copywriter to write a sales page for you, which can be a one-and-done project. This way, you don’t have to pay a copywriter to stand around.
- May be more affordable. You might pay more per hour for an independent contractor but your overall costs will be less. Since they’re not an employee, you’re not required to pay taxes, workers comp, unemployment, or benefits, nor do you have to cover the costs of office space or equipment.
- Less paperwork. Although there is less paperwork required to hire an independent contractor (we’ll get to that soon), it is much less when compared to hiring an employee. You’ll do less hiring paperwork, reports, and payments to the IRS. Paperwork for ending the relationship will be considerably diminished too.
How to Classify Independent Contractors Correctly
Independent contractors must be classified correctly in your records. Employees and 1099 contractors have different obligations under the IRS regulations and state laws.
Difference between employee and IC
One of the most common questions people have about independent contractors is how they differ from employees.
Hiring an employee comes with different advantages. You’re able to completely control their work while the employee is at work, and you can train them in the way you want the job done.
Independent contractors have complete control over how and when the work gets done.
Let’s say your company makes the decision to hire someone to manage your marketing.
You have two options: hire them as an in-house marketing manager or as an IC.
- If you go the first route, you can tell them what hours you want them to work and also have rights to the material they create.
- If you choose the latter option and hire them as an independent contractor, you can control what you want the end product to be and even the deadline but you cannot manage how they get from point A to point Z. This person also has the right to work with other companies as they wish, to include your competitors. Typically, they own all of their work and will detail in the contract the rights that you have to them.
Ownership can be tricky so we encourage you to consult with an attorney to address any grey areas.
These are all examples of what an independent contractor has freedom over.
Still, the IRS knows that there are many factors that can blur the lines between employees and 1099 contractors. So, they introduced the common law rule.
Common Law Rules
Common law rules help you figure out how much control you have vs. how much control they have in hopes of helping you identify them as employees or 1099 contractors. These are the considerations:
- Behavioral control: Do you have the right to direct and control what work gets done and how?
- Financial control: Do you have the right to direct or control the finances and business of the worker? This includes business expenses, tools, and profit and loss.
- Relationship: Are there employee benefits (insurance, pension, and PTO)? Are the services performed a key aspect of your business model?
Many states also have what is referred to as the ABC test to determine whether to classify a worker as an employee or an independent contractor. There are three parts to this test:
- The worker is free from the employer’s control or direction in performing the work
- The work takes place outside the company’s usual course of business, and off-site
- The worker is engaged in an independent trade, occupation, profession, or business
You should weigh all the factors since some will point to them being an employee, while others point to them being an IC. Look at the relationships along with the degree of control to come to a determination.
Misclassification of Independent Contractors
Misclassifying independent contractors can get very expensive, very quickly. The IRS may require you to back pay employment taxes if you classify an employee as an independent contractor with no basis for the decision.
This can come with other liabilities and fines as well. You might be responsible for providing benefits, workers’ compensation, unemployment, and other worker liabilities.
In the ‘90s, Microsoft was faced with the harsh realities of this, to the tune of $97M. They misclassified thousands of employees as freelance and temporary, which resulted in them having to pay what the misclassified employees would have made had they been classified correctly.
What Forms Do You Need to Hire an Independent Contractor?
The IRS requires two forms when hiring an independent contractor:
- W-9: They want this in order to get the correct name and TIN of the contractor. You’ll want to keep this for about four years in case the IRS comes with any questions.
- 1099-NEC: This is used to report any payments made by you to the contractor if you’re paying them at least $600 a year. You’ll have to send a copy of this to the IC by January 31st.
Additionally, there are a few other forms of paperwork that we suggest keeping in your files:
- Contract: Other than just being a good business form, this is a good way to agree on the details of the business relationship. Include details such as ownership rights, confidentiality, the scope of work, and payment terms. The contract should also state they acknowledge their position (they are not an employee), that they are responsible for their own taxes, and that they won’t be eligible for employee benefits and perks. You and the IC should sign this.
- Invoices: Typically, the contractor will have a pay schedule and will send you the invoices accordingly. Keep the invoices long enough for your accounts department to record the payments.
- Records. Hiring 1099 workers can increase audits. In order to prove your compliance, keep records of contracts, invoices, and proof of payments.
Should You Hire An Employee or 1099 Contractor?
To recap, consider hiring an employee when:
- The work needs to be supervised
- You want to control the hours and resources used to do the work
- The relationship needs to be long-term
- The work is essential to the business
Consider using an independent contractor when:
- The work is not central to the business
- The work doesn’t need much supervision
- The relationship can be short-term
If you’re still unsure, ask yourself the following questions:
- Do I want to have control over how the work gets done?
- Do I want to control when the work gets done?
- Do I want to offer benefits?
- Does this relationship need to be ongoing and long-term?
If you answered yes to most of the questions, you might look into hiring an employee. If not, an IC might be a better fit.
Tips for Hiring a 1099 Independent Contractor
1. Avoid job descriptions. Instead of using a job description to “bait” the best fit, consider scoping the project instead. Keep these things in mind:
- Be careful with the language you use within the ad. Be clear of what you’re looking for by using phrases such as, “contract basis” and “independent contractor.”
- Don’t use employee-targeted words like, “salary,” “wages,” or “steady work.”
- Consider looking for ICs who have put out their own ads under “Situations Wanted,” or “Trade Services” on sites like Upwork and Fivrr. Keep business cards, phone directory ads, circulars, or screenshots.
2. Interview employees and ICs the same way.
Do they have the experience? Do they fit the culture of the company? Have they successfully worked as a 1099 contractor before (and check their references)? If not, have they worked in roles where they had to work independently?
3. Avoid setting daily or weekly schedules.
As independent workers, they have the freedom to work for their clients/customers when they best see fit. You focus on communicating the deadlines and what the final product should be and they’ll focus on the other details
4. Allow them to supply their own tools, supplies, and equipment whenever possible.
Unless there is a very clear reason, they should be providing their own supplies, including the tech needed to complete the project. This will demonstrate that there is a risk of loss as well as an opportunity for profit.
5. Require an invoice before paying for any work.
If possible, make a payment to a company and not an individual.
- Look at the contract when wanting to end the relationship. You can’t just discharge a contractor from employment. If you’re dissatisfied with the quality of the work or if you can’t seem to work together, look to your contract for a way out. If there was never a contract, sever the relationship by giving them no more work.
- Be careful how you offer an employment opportunity. You may want to hire the IC as a worker in the future, but be careful when you approach the subject. Do not offer the opportunity until you are ready to take the step. You’ll also want to reconsider hiring someone as a W2 employee and an independent contractor in the same year. Along with misclassification, the IRS has really begun cracking down on this.
- A 1099 contractor and employee shouldn’t be doing the same work. Their work should not be core to the running of your business. The work your in-house marketing person does should be significantly different than what your marketing contractor does. Think of them as a tool in your toolbox, not a gear that makes the machine run.
- Do not give them any employee benefits. Under any circumstances. This can include things like gift cards, treatment at company events, and recognition. This can make your payroll more complicated, as well as blur the lines between employees and ICs (we know how expensive this can get).
Independent contractors can play a key role in the success of your company.
If you want minimal control, short-term contracts, and fewer financial liabilities, using an independent contractor might be the best choice for you.
Luckily, with the right goals, one or more independent contractors can become a part of your team, and these tips and tools should help. You can put this newfound insight to work for your own business or pay someone else to do it. The choice is yours.
As always though, if you need any help deciding whether you should hire an independent contractor, my team is here to help.