What You Need to Know When Hiring an Independent Contractor
Read our guide on what to consider when you're hiring a contractor, including pros and cons of hiring contractors vs. employees; when to hire in the U.S. vs. internationally; tax and legal compliance; and more.
Published on October 20, 2021
What’s an Independent Contractor and Should You Hire One?The exact definition of “contractor” may vary from country to country, but, in general: An independent contractor is a self-employed person or business that performs work for another person or business, according to the terms of a mutually agreed upon contract. If you’re looking to save on payroll costs or quickly kick out specialized projects, hiring an independent contractor could be the solution for you.
Pros of Hiring Contractors
- Speed: When you hire a contractor, you get to bypass the onboarding and training periods that an employee would undergo. You can quickly find a contractor with the skills needed for a project, and after drafting a contractor, that person can start immediately. This is especially beneficial when you have a project that you need to execute ASAP or if you need to bring on extra support during holiday seasons. For example, hiring a contractor to redesign your website might make more sense than hiring a web design employee if you need that redesign to go live soon.
- Costs: It’s easier to manage costs because you always know what you’ll be paying your contractor per project, and you won’t have to pay Social Security, Medicare, and payroll taxes that you’d need to pay if they were an employee. By U.S. law, contractors are responsible for paying their own self-employment taxes, as well as paying for and maintaining the necessary tools and office space for their work (please note that tax laws vary by country, though, so you'll need to check the laws of your contractor's specific country). Depending on the country, you may also save on benefits like unemployment compensation, worker’s compensation, paid time off, and health insurance since you may not be obligated to provide any of these to contractors.
- Specialized skills: Contractors excel at handling your specialized, one-off projects because of their advanced, in-demand skills. By bringing on a skilled worker for a specific purpose, you can more efficiently tackle those projects, like bookkeeping, social media, copywriting, etc. This can also alleviate the burden on your available workforce to focus on higher priority projects.
Cons of Hiring Contractors
- Engagement: Contractors may be less engaged in the day-to-day of your business than employees because you’re providing them with gig work and projects instead of a long-term, stable job. They also may market to additional clients besides you in order to get additional income.
- Availability: Because you can’t set their hours, contractors are less likely to be available on-demand for meetings or calls. If your work requires frequent check-ins and quick responses, contractors may not be the pick for you.
- Narrow scope: Contractors often handle a one-off project or specific need with a narrow scope or for a short term, e.g., scheduling 10 social media posts per week or performing copy editing for a month. If the work you need to be done requires collaborations across departments or lasts longer than a year, you may consider hiring an employee instead.
What You Should Consider When Hiring ContractorsIf you don’t consider all the legal and financial nitty-gritty before hiring contractors, then you risk running into problems later on. Here are some things to keep on your radar:
Local vs. International ContractorsChoosing to hire contractors often allows you to tap into the vast global talent pool to find the best fit for your needs. Here are some considerations to make when hiring local contractors vs. international contractors:
- Costs: The market rate for a certain role may vary based on location, and contractors have more leverage in setting their own rates. International contractors may cost more or less depending on their industry and your needs.
- Laws: When hiring domestically, you have the advantage of being more familiar with your local, state, and federal laws. In contrast, international employment laws vary by country, so when hiring international contractors, you may run into confusion when dealing with taxes, contracts, and other compliance concerns.
- Payment: Paying your international contractors on time and in their own currency can be difficult. Some employers may choose to hire local contractors instead for ease of payment.
- Talent: If you want to hire the best person for a job, they may not live in your country. In these cases, it may make more sense to hire that international candidate as a contractor.
- Communications: Due to time zone differences, it can be difficult to get a hold of international contractors. If getting fast responses and meeting face to face is important to your work, it may make more sense to hire locally instead.
- IP protection: Intellectual property transfer laws differ by country, so how do you ensure that your company’s IP remains yours while working with international employees? You’ll have to research the IP laws of the country you’re hiring in and include country-specific IP transfer clauses (we specialize in those!) in your employment contracts.
Legal ComplianceStaying compliant with all local, state, federal, and international laws is an important concern when hiring contractors in order to avoid common legal pitfalls. Here are some examples of laws to look into regarding hiring contractors:
- Rights: According to the IRS, contractors have the right to control where, when, and how they work. That means that as an employer, you can’t dictate their schedule or force them to come to a certain place. They also must remain free to work for other clients, though you may be able to specify the scope of non-competition in the employment contract.
- Taxes: While you may not be responsible for paying employment taxes for contractors, you still have to request and file the appropriate tax forms every year, most commonly Form W-9 and Form 1099. Make sure to keep track of what taxes you’re responsible for to avoid being blindsided during tax season.
- Labor laws: When hiring contractors, research the labor laws that govern contract work, both domestically and in any countries where you’re hiring. These laws can cover how long you can hire a contractor for, IP protection, whether you’re obligated to provide some benefits, and more. They also vary from country to country; for example, in France and Spain, you have to give contractors benefits and withhold taxes from their payroll, as if they’re full-time employees.
ClassificationState-level studies from 2015 indicate that anywhere from 10% to 20% of U.S. employers misclassify at least one worker. When hiring contractors and employees, it’s critical to make sure you classify your workers correctly or risk facing hefty penalties. Even if you unintentionally misclassify an employee as a contractor, the IRS could still penalize you heavily for a whole host of things — not filing Form W-2 when you should have filed one, missing income tax payments and tax withholdings, not providing workers’ compensation insurance or unemployment insurance, etc. If it suspects intentional misclassification or fraud, the IRS could levy greater fines and even impose criminal penalties. You could even face high-profile, costly misclassification lawsuits, like FedEx, which agreed to pay $228 million to workers they misclassified as independent contractors. Here are some tips to avoid misclassification and all the penalties associated with it:
- Thoroughly research the differences between contractors and full-time employees to make sure that you’re classifying each appropriately.
- Look into guidelines and laws from tax authorities. The IRS has specific rules that govern what separates contractors and employees, based on three main factors: behavioral control, financial control, and the nature of the employment relationship. Some states have their own tests for determining how to classify contractors; for example, California has the ABC test to decide whether a worker is a contractor or employee.
- Make sure that your workers are fully aware of whether they’re employees or contractors, based on their job descriptions and employment contracts. With international workers, include them in that conversation; some overseas workers may prefer to be paid and treated as a contractor instead of an employee due to various considerations, like more favorable taxes.
Checklist for Hiring Independent Contractors in 4 Easy Steps
1. Write a Clear Job DescriptionStart your search for the perfect contractor on the right foot with a well-crafted job description that explains what you’re looking for in the ideal candidate. Make sure to include these things in your job descriptions:
- A summary of the role and how it fits into your company
- The requirements, responsibilities, and skills necessary for the job
- The length of the contract (e.g., six months, one year)
- Scope of work (e.g., four blog posts per month, 15 hours per week, etc.)
- A statement that the position will have independent contractor status instead of full-time or part-time employee status
- Request for a portfolio of past work
2. Draft Contracts and Independent Contractor Agreements CarefullyThey say that the devil is in the details, and that’s especially true for legally binding contracts. That’s why it’s important to take your time to draft contracts that detail the relationship between employer and contractor and are compliant with all local and federal laws. Here are some things you should include in your contracts:
- Statement of the relationship: Specify that this is an independent contractor relationship, not employer-employee. Define the length of employment, i.e., six months, 12 months, or as needed, as well as the expected amount of work hours, if necessary.
- Scope of work: What will you receive from the contractor in terms of concrete deliverables or project goals?
- Timeline and deadlines: When do you expect the final deliverables and results? Include any key deadlines and whether input from stakeholders will be required.
- Payment rate and terms: How and when will you pay the contractor? How much?
- Responsibilities: Who is responsible for paying taxes? Will you require the contractor to have liability insurance?
- Termination: Who can cancel the contract and for what reasons? How much notice should be given and how?
- Confidentiality and nondisclosure clause: Protect trade secrets and company know-how. For complex or highly sensitive projects, it may be better to ask contractors to sign a separate nondisclosure agreement (NDA).
- Non-compete clauses: Will you prevent contractors from working with your direct competitors during their contract with you and for a set period after? Be aware, though, that non-compete clauses may not be enforceable in certain states, like California.
- IP transfer clauses: Protect your business and your workers by clarifying that work-related products created in the scope of the contract, as well as any deliverable(s), will remain the sole property of the company. Make sure that these IP transfer clauses cover the laws of both your country and your worker’s country, if different. Oftentimes, IP needs to transfer from the employee to multiple partner entities before finally transferring to your company. We do things a little differently, with streamlined, direct IP assignments.
- Disputes: How will you handle any disputes over the contract or work produced? Which laws will you use to enforce the contract?
3. Set Up a Way to Pay ThemSmooth logistics make for smooth sailing: When hiring contractors, make sure you have a system in place to pay your contractors accurately and on time.
- Minimize fees: Avoid fees associated with wire transfers and e-wallets — from deposit fees to withdrawal fees to currency conversion fees, they all add up. Direct deposit is the way to go wherever you can.
- Pay on time: According to a 2018 survey of more than 1,400 contractors and freelancers by Bill.com, 45% said their clients failed to pay them on time. Don’t burden your contractors; set up a payment schedule and stick to it. You can automate payments to ensure reliable payments and avoid delays.
- Keep track: Maintain your books to track invoices and contractor payments to prepare for tax season and protect yourselves in case of audits.
4. File Tax Forms Accurately and On TimeTaxes are inevitable, and even though contractors are responsible for paying their own taxes, you’re still responsible for filing IRS forms. Here are some of the main forms you need when hiring independent contractors:
- Form W-9: Request information from your contractor, including their contact details and Taxpayer Identification Number, to make sure you can pay them and classify them appropriately. Should be requested at the beginning of any independent contractor relationship.
- Form W-8 BEN: Serves the same purpose as W-9, but for international contractors.
Additional ResourcesFor further reading on hiring independent contractors, check out more from our blog.
The information contained in this site is provided for informational purposes only, and should not be construed as legal advice on any subject matter.
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