The Right Way to Hire a Contractor

Growing a business can be tough. The good news is in today’s gig economy there are plenty of people who offer their contractor services to help. Before you agree to hire someone short-term, there are a few things you should consider.

Employee or Independent Contractor 

Determine whether the individual you’re hiring should be treated as an employee or an independent contractor.

Independent contractors are unique because the payer has the right to control only the result of the work. With hired employees the company has more control over the hours worked and how work is performed. However, employees tend to be more expensive as the employer pays for Social Security and Medicare, unemployment taxes, and spend time handling administrative burdens. Independent contractors, on the other hand, pay their own taxes.

The benefits of hiring an independent contractor are no doubt appealing. If you decide this is the best option for your business, there are a few requirements to follow in order to remain tax compliant.

  • Proper Paperwork

    Ask your contractors to fill out Form W-9 BEFORE you start working with them. This will provide you with their name, address, SSN, EIN and residency status.  You are required to send each contractor a 1099 at the end of each year if you paid them more than $600.  These payments will likely be reported to the IRS through Box 7 of 1099-MISC.  As an exception, payments made to corporations are not subject to 1099-MISC unless those payments are for legal services.

  • Foreign Contractors

    Payments to foreign contractors are not subject to 1099 if the individual is not a S. person and the services were performed outside the US. The tax payer should ask the foreign contractor to complete Form W-8BEN as proof that they are not a US person.  In case of IRS audits, this will explain why no 1099 was issued.

  • Form Submission

    All 1099s must be submitted to the IRS on or before January 31st at the end of the year. Like most federal forms, taxpayers can paper file or e-file 1099-MISC.  Failure to file and late filing of 1099 can result in penalties.  Late filing penalties range from $50-260 per return, while intentional disregard is subject to a penalty of $530 per return.

Once you decide to hire a contractor, applying the above suggestions can ensure you experience a hassle-free process.