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5 Things to Know About Hiring Independent Contractors

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5 Things to Know About Hiring Independent Contractors

By NicoleD
Published: October 4, 2010

An independent contractor (also known as a consultant or freelancer) does not regularly work for an employer, but instead performs work on a temporary or as required basis, according to their employment contract. If yo;re thinking of hiring an independent contractor here are some factors to consider:

1. Money matters

One of the main reasons businesses outsource labor is to save money. It might not add up at first - independent contractors usually receive a higher hourly rate than an employee - but over time, employers usually see savings because they don't have to provide costly benefits, training, or compensation packages to their contractors.

However, any potential savings can be blown if you don't make the time to research your options before you draw up contacts. Depending on your written agreement, you may not have the flexibility to fire or dismiss contractors as would with regular employees, even if you are dissatisfied with their work. Take the time to research on your own or seek recommendations from your peers.

2. Flexibility matters

If you're weighing whether to hire an independent contractor or an employee, consider the job's work schedule. Businesses that experience seasonal peaks and valleys (think construction) or are in need of quick access to particular skills (like web design or language translation) are often drawn to the flexibility of contractor arrangements.

Conversely, if your business requires more stability in a worker, perhaps a contractor is not the best option. Ask yourself if you might find a contractor's schedule disruptive to your regular workflow, or if you would be comfortable supervising from a literal and/or figurative distance.

3. Property matters

Independent contractors may own the intellectual property that they create for your business. If you are concerned about the ownership of copyrighted material, be sure to address this in the contract. Keep in mind that artists, writers, or other freelancers may not be open to relinquishing creative rights.

4. Tax matters
If you pay independent contractors, you generally won't withhold or pay any taxes on payments, but you may have to file Form 1099-MISC (Miscellaneous Income) to report payments for services performed for your trade or business. If these four conditions are met, you generally report a payment as non-employee compensation.

The IRS maintains that it is critical for business owners to correctly identify individuals providing services to their business as employees or independent contractors. Businesses that pay independent contractors may increase their chances of likelihood of an audit, as state and federal tax agencies look to verify reported employment services. You should verify a worker's contractor status before you hire them by requiring documentation that supports their self-employed status. Learn more how Misclassifying Workers as Independent Contractors Can Be Costly.

5. Liability matters

Independent contractors are not covered under your workers' compensation plan. If an independent contractor is injured on the job as a result of negligence, they may have the right to sue you for damages. The key lesson here is to ensure that your work site is safe for everyone.

Additional resources:

Message Edited by NicoleD on 08-11-2009 02:37 PM
Message Edited by NicoleD on 08-19-2009 11:28 AM

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Here's what I don't get. I file a Schedule C for my LLC, and my tax accountant never mentioned needing to do a 1099 for payments made to my contractors. They receive more than $600/yr. But I report these payments on the Schedule C ? I don't understand why the Schedule C would ask for this info, and then I'd also have to supply it on a separate 1099 form? Or am I misunderstanding something?
I am thinking of hiring an online assistant, which doesn't work at my business location, and works only when my workload is too high for me to handle.What criteria determine if this can be a contracted position?Diane Neill Jensenhttp://DianeNeillJensen.com/making-money-ideas 
Bill and Peter - I'm unfamiliar with any reclassification of indpendent contractors. Reclassification would primarily affect your status with the IRS and employment benefits. I would suggest talking to your accountant or your local EEOO office if you have concerns or questions.
Bill, As a realtor myself, I too have heard of the government's interest in reclassifying our status, which frankly concerns me. Does anyone have anything additional on this? Peter 
Diane, this reference from the IRS should help you out: http://www.irs.gov/businesses/small/article/0,,id=99921,00.html
I have heard that there have been cases where the government has challenged the way certain industries classify their work relationship. The real estate industry is one example. Is there a reason why the government would wish to classify a Realtor for example, as an employee rather than an independant contractor? Bill Fletcher,Orange County Website DesignMessage Edited by NicoleD on 09-30-2009 12:07 PM

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