The use of independent contractors, versus permanent hires across America continues to grow. Like any new business practice, there are new regulations and requirements that need to be adhered to when entering this type of employer/worker relationship.
Unlike the more traditional employer/employee relationship, when you hire an independent contractor both parties are engaging in a business-to-business (B2B) transaction. While this may eliminate a lot of the onboarding requirements, it does not eliminate the need to be clear about who does what, why, how, when, for how long, and at what price. In short, there is still a need to be perfectly clear from the beginning what the nature of the relationship is. Otherwise, you could be subject to excessive fines, back payroll taxes and other penalties.
To avoid the negative outcomes while enjoying the benefits of this type of working relationship, here are some things you should know:
- Get it in Writing | A general rule of thumb in business is to always get things in writing. This applies to everything from simple petty cash purchases to the more complex managing of human resources. The more complex, the more the documentation. In the case of independent contracting, having a written contract that defines the scope of work, deliverables, payment terms, timeframe, and all other related details is necessary. Before any work begins, this document needs to be in place and signed by both you and the independent contractor.
- Who Owns What? | Ownership is an important factor to consider when working with an independent contractor. This means defining intellectual property rights in advance. In a typical employer/employee relationship, work outcomes are the property of the employer. However, with an independent contractor, where they are a separate business entity, this issue must be addressed in advance. If you choose to claim ownership of any work they produce, this must to be plainly stated in the contract to avoid legal issues in the future.
- Ask for Referrals | B2B relationships involve two businesses. As such, it can be smart for both parties to request referrals in advance. While this may be obvious from the employer’s perspective, independent contractors also benefit from this practice. Contractors will want to be sure that there are funds available to pay them and that the business has a good B2B reputation. For the employer, in addition to contacting some of the contractor’s prior clients, you may also inquire if they are registered in any online work platforms. If so, there may be a history there as well about the nature of their work. For the independent contractor, the Better Business Bureau, D&B, and the state Secretary of State’s Office may offer some useful information as well as other independent contractors that may have worked with that business.
- Run a Background Check | Data suggests that over 56 percent of people lie on their resumes – Yikes?!?!? If this is true with traditional hires, it may also hold true with independent contractors. Either way, a background check is an easy, cost-effective way to verify that who you’re considering contracting with is who they say they are. There are way too many examples where the wrong working relationship can go wrong.
- Request IRS Form W-9 | The IRS form W-9 is a Request for Taxpayer Identification Number and Certification. Though you don’t have to withhold income tax when paying an independent contractor, you do have to report any payments on your tax form 1099-MISC if you paid a contractor over $600 in the tax year. The W-9 provides you with all of the necessary information you need to complete the 1099-MISC.
- Verify Worker’s Comp’ Insurance | Where the employer and independent contractor are separate businesses, each is responsible for protecting against personal and related business liability factors. While this may be standard practice for the employer, this may not be understood by all independent contractors. Accordingly, it is helpful to require evidence of insurance beforehand to ensure all parties are appropriately insured.
- Maintain Records | For both legal and regulatory compliance reasons, both parties want to establish and maintain records about the nature of the work, intellectual property rights, all payment exchanges, and related communications. This will help to prove that the working relationship is in fact, a B2B relationship and not an employer/employee relationship. Because of past violations, the U.S. Department of Labor is investigating many employers in this area. Where there is a lack of proof, they are imposing fines and recovering lost payroll and related taxes. The general rule of thumb is to keep important records on file for seven years.
Independent contracting offers both pros and cons for everyone involved. Whatever your situation, it’s smart to head into independent contracting with an awareness of what’s involved. The more you know, the more the pros will outweigh the cons.