Hiring independent contractors is a strategy many businesses use to achieve success. Also known as consultants or freelancers, independent contractors perform work based on the terms of an agreed upon independent contractor agreement, usually on a temporary or as needed basis.
There are many benefits to hiring freelancers. However, before doing so, first think through the below factors. If you don’t, outsourcing work to contractors could hurt your business more than it helps.
1. Money Matters
The main reason to consider hiring independent contractors is to save your business money. While freelancers usually charge a higher hourly rate than a salaried employee, they don’t receive any benefits, training or compensation packages.
But if you don’t take the time to hire the right contractor, you might end up losing money, according to the U.S. Small Business Administration. Depending on the terms of your contract, you might not be able to fire a freelancer for poor work quality. Do your research and ask for references to ensure the person that you bring on can properly execute the tasks you need completed.
2. Taxes Matter
You are able to deduct contractor payments and generally won’t withhold or pay taxes on them. Just make sure to follow all tax regulations and send a 1099-MISC form every year to your freelancers and the IRS.
3. Contracts Matter
A carefully considered independent contractor agreement is among the crucial legal documents all small businesses need. Here’s the language it should contain:
- Title the contract as an “Independent Contractor Agreement.” This is key for the contract to be considered valid evidence if you are ever audited by the IRS, says OptionExercise.com founder Tom Taulli.
- Clear expectations. Provide as much detail as possible in the scope of work section of the contract, including deadlines and quality expectations. The less details you provide, the more likely it is that you’ll be vulnerable to legal disputes.
- Withholding/benefits clause. State that there will be no federal withholding or benefits.
- Ownership clause. State that your company will own all of the freelancer’s work.
- Confidentiality clause. State that the terms and information shared are confidential. (See essential legal documents for more on non-disclosure and confidentiality language.)
- Nonsolicitation clause. State that there will be no solicitation of clients or employees.
- Termination clause. State that you have a right to terminate the contract if the work is substandard, violates the terms of the agreement or there are missed deadlines.
4. Job Title Matters
With certain job titles, the IRS assumes that those workers are contractors and not salaried employees. Other job titles will raise red flags if those workers are considered independent contractors.
- Salespeople. If you plan to pay your salespeople on commission, they will most likely be considered contractors. Thus, make sure you have a proper independent contractor agreement for each one.
- Interns. Hiring interns as independent contractors is possible but can be tricky. If interns are not their own legal entity and spending all of their working hours on your premises, they probably fail the freelancer test. Check out our guide on the basics of hiring interns for more guidance.
5. Be Careful Whom You Categorize as a Contractor
To cut costs, you might be considering hiring only independent contractors instead of salaried employees.
However, there are IRS rules and regulations that prevent you from doing this. Thus, before hiring people as freelancers, make sure they fit the IRS definition or you might find yourself in legal trouble.
- When They’re Considered Employees: According to the National Federation of Independent Business, if a person works regularly at a company facility, uses company-owned equipment to do their job and must work during specified hours, that person would probably be considered an employee.
- When They’re Considered Independent Contractors: If a person works offsite, uses his or her own equipment, pays his or her own insurance, phone and utility bills and makes his or her own hours, that person would probably be considered an independent contractor.
Freelancers can be a cost-effective way to get essential work done on a tight budget. Just make sure you follow all rules and regulations and write a strong independent contractor agreement or you might not end up saving any money at all.