Contracts for Independent Contractors
Contracts for independent contractors are essential tools when it comes to hiring practices.3 min read
Contracts for independent contractors are essential tools when it comes to hiring practices. For employers, the hiring of independent contractors, freelancers, or consultants can save you time and money.
The proper classification of a worker allows employers to file taxes properly, and to make sure the company complies with labor laws. Further, employers must pay a certain amount of payroll taxes on behalf of employees, while independent contractors must file their own personal taxes and pay any due tax.
- Note: Hiring an independent contractor is a different process than hiring an employee
For example, less paperwork is required because tax authorities do not factor into payroll taxation. With that, you must still verify a contractor tax ID and ensure the person you’re considering is of suitable character and reputation. Additionally, you want to ensure the contractor does not reveal any sensitive company information or leave your company while taking employees or customers.
Independent Contractor Agreement Provisions
Independent contractor agreements are effective when an entity or business intends to complete a specific project or task on a short-term basis. Essentially, it is a written agreement that details terms and conditions between the customer and contractor. Such an agreement should include:
- Provided Services
- Length and Terms of Project or Service
- Payment Method
- Dispute Resolution Measures
Further, the contract agreement not only displays the working relationship between client and contractor, but also discloses info to the IRS for tax purposes. It’s worth noting that no contract protects you from IRS penalties, but you can avoid the wrath of the IRS if you treat the contractor accordingly and not as an employee. With that, you should not treat a contractor as an employee, as the IRS can hit you with harsh penalties.
An independent contractor agreement is appropriate when:
- You intend to complete service for a company or person from project to project (in the form of a freelancer or independent contractor).
- You receive services from a contractor.
The most important factor to consider when hiring an independent contractor is that you should record all payments made to the contractor. If you pay someone $600 or more each year, you must provide them with a Form W-9 so they can file their personal taxes accordingly. A typical W-9 includes:
- Taxpayer Identification Number
In addition, you should keep a W-9 on file for every independent contractor. Further, you also have the necessary information to draft a 1099-MISC Form on a contractor for the tax year. A 1099-MISC Form is the equivalent to a W-2 for employees. Keep in mind that there may be income tax withholding in certain states, which is why you should research the tax laws of your respective state.
Assessing an Applicant
Before hiring a person, you should request and maintain a copy of documents showing the qualifications of an applicant. If you ask a person to submit an application, stress to them that the position is a contract position. Always air on the side of caution by asking for a detailed resume outlining such factors as:
- Employment History
- Any Other Noteworthy Credentials
In addition, ask for references from previous employers and/or individuals who have worked with the applicant in the past, and you should ask for good references (ex. pastors and brothers-in-law are not good references).
If possible, do a background on the applicant as well. If the applicant will do confidential or sensitive work, you should conduct a background check and check all provided references. Also, get a copy of any insurance if the applicant states that he or she is insured or bonded.
For every independent contractor who works for your company, you should have a copy of a contract on file, signed by both parties.
When working with a contractor, all documentation should be signed by each party, and you should keep such papers on file for future reference.
- Remember: All contractor relationships should be on record and put in writing to protect both parties if a dispute arises.
Above all, the contract should clearly state that the intended position is contracted for the job, and the applicant would not be considered an employee.
Do you need to learn more about contracts for independent contractors? To find out more, submit your legal inquiry to our UpCounsel marketplace. UpCounel’s lawyers have graduated from some of the top law schools in the county and will help you draft a sound independent contractor agreement that will protect all parties, whether you are a contractor or client. In addition, our lawyers will help employers remain compliant under all IRS tax laws while guiding you in how you should treat contractors.