How to Hire an Independent Contractor

Sooner or later, most business owners need to hire people to help them. You must obey federal and state tax and labor laws whenever you hire a helper. Let's discuss the ramifications of hiring employees or independent contractors.

Hiring employees versus independent contractors

Hiring employees or self-employed independent contractors means following different labor rules. The IRS and other agencies determine which workers fall into which category.

For employees, you must withhold taxes from the person's pay. You must also pay other taxes for the employee yourself. You must also follow complex and burdensome bookkeeping and reporting requirements.

Also, a host of federal and state labor laws apply whenever you hire an employee. These can include workers' compensation and unemployment insurance coverage.

If you hire an independent contractor, you need not follow any of these requirements. The independent contractor pays their own self-employment tax dues. All you have to do is report the amount you compensate the contractor to the IRS and your state tax department.

But, hiring an independent contractor is not necessarily cheaper than hiring an employee. Some independent contractors charge far more than what you'd pay an employee to do similar work. Still, many prefer to hire contractors instead of employees because of the lesser tax and legal burdens.

Pros and cons of hiring employees

There are advantages and disadvantages to hiring employees and independent contractors.

Pros

• You don't need to worry about government auditors claiming you misclassified employees
• You can closely supervise employees
• Employees can get extensive training
• Employees can't sue you for damages if they are injured on the job provided you have workers' compensation insurance
• You automatically own any intellectual property employees create on the job
• Employees generally can be fired at any time

Cons

• You must pay federal and state payroll taxes for them
• You must provide them with office space and equipment
• Liable for your employees' actions
• Provide employees with workers compensation coverage
• You ordinarily provide employees with benefits such as vacations and sick leave
• You can be sued for labor law violations

Pros and cons of hiring independent contractors

Pros:

• You don't have to pay federal and state payroll taxes
• You don't have to provide office space or equipment
• Generally not liable for their actions
• You don't have to provide workers' compensation insurance
• Provision of employee benefits not necessary
• Your exposure to lawsuits for labor law violations is reduced

Cons:

• You risk exposure to audits by the IRS and other agencies
• You can't closely supervise or train
• The possibility of losing copyright ownership if you don't get an assignment of rights
• They can sue you for damages if they are injured on the job
• They may work for your competitors as well as you.
• Usually, you can't terminate them without liability unless they violate their contracts

Hiring temporary help

If you need extra help, one option is to hire a "temp" from a temporary help agency. When you hire a temp, you do not hire an individual worker yourself. You contract with the temp agency to provide you with a service. That service is a person who will perform specified tasks for your business.

The temp is an employee of the temp agency. The temp agency pays the temp's salary and payroll taxes. The agency also provides workers' compensation coverage.

It may cost more per hour to hire a temp, but you will save on paperwork and won't need to worry about the status of your worker. Make sure to deal with a reputable agency that satisfies all employer tax and insurance requirements.

If the agency fails to pay the temp's payroll taxes or provide workers' compensation coverage, you could end up having to foot the bill.

Determining worker status

It's up to you to determine whether any person you hire is an employee or an independent contractor. If you decide that a worker is an employee, you must follow the legal requirements covered below. If you decide the worker is an independent contractor, there are simpler requirements.

Your decision about how to classify a worker is subject to review by various government agencies. This includes:

• The IRS
• The Department of Labor
• Your state's tax department
• State labor department regulations
• State unemployment compensation insurance agency rules
• Your state's workers' compensation insurance agency

Any agency may determine that you misclassified an employee as an independent contractor. They may also impose back taxes, fines, and penalties.

Scrutinizing agencies use various tests to determine whether a worker is an employee. The determining factor is usually whether you have the right to control the worker.

The worker is your employee if you have the right to control the way a worker does their work. They're an independent contractor if your control amounts to accepting or rejecting the final results.

The employer may not always exercise this right of control. For example, if an employee is experienced and well trained, you may not feel the need to supervise him or her closely. But if you have the right to do so, the worker is still considered an employee.

Determining who is an independent contractor

A worker is an independent contractor if the hiring firm doesn't have the right to control how they do their job. Unlike an employee, the worker is not supervised daily.

It can be challenging to figure out whether a hiring firm has the right to control a worker. The factors each government agency relies upon to measure control vary.

Some agencies look at 14 factors to see if a worker is an employee or an independent contractor. Others look at 11 factors, and others consider only three. Which of these elements is of the greatest or least importance is anyone's guess.

This makes it very difficult to know whether a worker is an independent contractor or employee.

Legal responsibilities when you hire employees

Whenever you hire an employee, you take on a variety of legal responsibilities. The more employees you have, the more onerous the legal rules.

For example, employers with more than 50 full-time employees must fully comply with Obamacare's employer mandate. This means they have to provide their employees with health insurance or face significant monetary penalties.