As the new year approaches, hiring new independent contractors may be an attractive option. A smart employer will be able to do without getting ensnared in the various legal quagmires that surround independent contractors.
To start off the fiscal year right, here are three tips you may want to consider when hiring independent contractors:
1. Paying More Than $600? Get the Contractor's TIN.
The IRS requires that every business report expenses paid to independent contractors who are paid more than $600 in that tax year via a 1099 MISC form. In order to file this 1099 MISC form, employers need to have a Taxpayer Identification Number (TIN) on file for each independent contractor.
What's a TIN? For most sole proprietors and independent contractors, their Social Security numbers (SSNs) function as their TINs. This means your business should be in the habit of collection SSNs for any contract job (even if you think it won't go over $600).
Other forms of TINs include:
- Individual Taxpayer Identification Number (ITIN). Issued to resident and non-resident aliens who do not qualify for a SSN.
- Adoption Taxpayer Identification Number (ATIN). Temporarily issued for adopted children without SSNs.
- Employee Identification Number (EIN). Just like any business, a sole proprietor can apply for an EIN and provide it in lieu of a SSN.
The key is to get one of these forms of ID for any independent contractor.
2. Don't Treat Contractors Like Employees.
This doesn't mean that you should treat your independent contractors like a rented mule. However, you should be aware that the more of an employer-employee relationship forms, the more the IRS will believe that the worker is a true employee.
Allow the independent contractor significant control over his or her work, and avoid making an independent contractor just another member of the team with significantly fewer benefits.
3. Draft Your Contractor Agreement Carefully.
A good way to distinguish an independent contractor from an employee is through the language of their contracts. Savvy employers will be sure to include:
- Explicit classification as an independent contractor,
- A clearly defined scope of work,
- A well-outlined payment schedule,
- The source of payments (especially if through third party company), and
- An unequivocal statement about no employee benefits.
If you're drafting an independent contractor agreement for the first time or have questions about your current form of contract, contact an experienced employment attorney in your area today.
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