The key to hiring an independent contractor is to make sure you don’t accidentally hire an employee. What’s the difference? Here are a few factors to look for.
- Contractor. A contractor has control over his daily activities. He determines how he will complete a specific task, such as create a database or build a fence, and you pay him based on the value of the completed task. He also determines how to financially get the job done, such as what materials to use and where to buy them with money he has deposited into his own business account. Plus, both parties believe they are in a contractor relationship, not an employee/boss relationship. All of these factors must be met, or else the contractor may really be an employee. Want to see what happens if you fail to clearly establish a contractor relationship? Check out this story where the owner required the contractor to work specific hours, but failed to pay overtime. The contractor may have turned into an employee, which is not good news for the boss, who may owe back taxes and insurance costs, along with fines.
- Employee. As boss, you tell your employee where to work, when, and how. You control his tools and workspace. You pay him a wage based on time, not for the completion of a specific task. In addition to the wage, you pay your share of Social Security and Medicare taxes, state unemployment compensation and workers’ compensation insurance. Any materials that are bought for the job come out of your business account and not out of your employee’s checking account.
- Contract. If you want to set up a contractor relationship, first make sure you are going to follow the contractor rules and then put together the contract. In the ICA (independent contract agreement) you will spell out your expectations for job completion and state the contractor is responsible for all taxes and insurance. Also state how any termination might take place. Remember the key provisions will help establish a true contractor relationship, so you must establish that the contractor has behavioral control over how he accomplishes the task, financial control over how he pays for materials, and you both agree there is contractor relationship. The IRS shows these key factors here. Failure to fully establish a contractor relationship may make you liable for taxes, unemployment compensation and workers’ compensation costs, and fines. Other terms to consider are non0compete language and a severability phrase that preserves part of the contract even if some aspects are invalidated. You can check here for an example of why this is important and why you want to hire an employment attorney before signing an ICA.
- Intellectual property. Make sure your contract states whether you own the contractor’s intellectual property created on your behalf. For example, if you hire a graphic designer to create a logo, but you don’t put anything in writing, then the designer may retain rights to the logo. Your attorney will help protect your rights.
- $600 rule. If you pay the contractor more than $600, then you need to report that to the IRS.
Just remember that once you hire a contractor, don’t treat him like an employee by demanding an hourly work schedule and control over how the job is done. If you follow these rules, then you can enjoy peace of mind while your contractor gets his job done.
