A Guide on How to Hire an Independent Contractor in California.

Hiring a contractor (also known as an independent contractor) is to hire any non-employee who provides you with a service. Examples can include non-employee software engineers, accountants, marketing consultants and lawyers. Hiring a consultant requires defining the relationship, the expected work and payment, and ensuring that work product is properly assigned to the company.

1. Review nature of proposed project for consultant

Are you sure your person should be classified as an independent contractor and not an employee?  This is more of a concern for the company using the independent contractor, as there are significant penalties for misclassifying someone as an independent contractor rather than an employee.  Employee audits are becoming increasingly frequent, so this is no small matter – even for a startup (just ask Groupon, who got nailed with an employee audit in 2010). The IRS has laid out guidelines for determining whether someone would be classified as an independent contractor or an employee

2. Collect W-9 from Independent Contractor

Form W-9 is the IRS form used by a company to request a taxpayer identification number. A tax identification number can be a Social Security Number, or the Employer Identification Number of the independent contractor's business.  A business using an independent contractor should request that every independent contractor submit a W-9 which the business will need for tax purposes.   Filling out a W-9 is pretty straightforward. The independent contractor will need to include their name and Social Security Number, or the name and Employer Identification Number of your business. By submitting a W-9, the Independent Contractor is certifying that the tax id number they are providing is correct and accurate.

3. Execute Independent Contracting Agreement

The independent contracting agreement is the primary/master agreement which manages the relationship between a company and an independent contractor.  Among other things, the agreement should establish 1) an independent contracting relationship, 2) ownership rights in any work product, and 3) confidentiality. See: UpCounsel’s Independent Contractor Agreement

4. Optional items you may want/need to do for your independent contractor

Depending on the nature of the relationship and your own company, you may or may not need the following:

Pre-relationship Non-Disclosure Agreement           

An NDA is a great way to start an independent contracting relationship especially if there is sensitive materials that need to be explained in order for the contractor to understand the job.  A typical one-way NDA prevents the contractor from disclosing confidential information for a two or three year period, so if you do not hire the contractor, you have some protection.

There are a number of carveouts either party can add to the NDA.  Carveouts are items that will not be included in the terms of the agreement. This may include information that is already publicly known or already known by the independent contractor, information that is independently revealed outside of the realm of the NDA, or information that is received from other people.  

Options or restricted stock

It is rare, unless you are very early stage to pay consultants with equity, but if you do, this step is all about deciding whether to use 1) restricted stock OR 2) non-statutory stock options to compensate the consultant. Restricted stock requires the consultant pay for their stock and is best to use if the value of the stock is still at its original par value (so really really cheap such as $0.0001) Non-statutory stock options are the type of option you issue to consultants (vs incentive stock options for employees). These are best when the common stock value has risen enough in value (e.g. raised money, product release, etc.) that paying for them would be expensive for the consultant.

See the UpCounsel Guide to Giving Restricted Stock

See the UpCounsel Guide to Equity Split

Amendment to Independent Contracting Agreement

Often throughout the lifetime of a independent contracting relationship certain expectations or elements of the relationship will change. These changes are almost always limited to the statement of work and include price, performed services, or certain covered costs. The changes do not include other legal elements of the relationship that are contained within the body of the Independent Contracting Agreement. The Amendment To The Independent Contracting Agreement Statement of Work seen here lets the parties amend the Statement of Work easily.  Complete the Amendment and attach a new Statement of Work as the parties want it to read. It will replace the old Statement of Work from the date of the Amendment.

5. Report use of Independent Contractor with California

Where the independent contractor:   1) is NOT a corporation, general partnership, limited liability partnership, or limited liability company (but rather an individual or sole proprietorship); AND 2) You paid the independent contractor $600 or more OR enter into a contract for $600 or more, You must report the independent contractor to EDD within 20 days of paying/contracting for $600 or more in services.  Details on what information must be reported can be seen on the California Employment Development Department website.  You can use the attached form or e-file with the California e-Services for Business Portal, which will require you to create an account.

6. Complete two 1099-MISC forms

If you pay an independent contractor more than $600 in your fiscal year, then you are required to complete a 1099-MISC form.  You will need to complete two 1099 forms - one which your company will file for your own taxes and one that you will submit to the independent contractor that he/she will file for their taxes.  The form should include your business name, address, phone number, and employer identification number, as well as the independent contractor’s address, Social Security number, and the amount paid to him or her.   If you fail to file the 1099 to the IRS, you may be penalized $100 for each form you failed to file and an additional $100 for every independent contractor that did not receive a 1099 from you. You do not need to provide a completed 1099 if the independent contractor is a corporation, or if the payment was included in a W-2, or if the payment is for a tangible product. After providing the 1099-MISC form to your independent contractor, you must file one with the IRS for your own taxes.  When filing the 1099-MISC form with the IRS, you will need to use a 1096 Form.

7. Optional items after hiring your independent contractor

After creating a working relationship with the independent contractor, you may want or need to do the following:

Sign up for payroll to pay Independent Contractor

If you will have any independent contractors working for an extended period of time or a number of independent contractors working for you, it might be easier to use an electronic payroll service to handle any payments to the independent contractor(s).  For example, Intuit Payroll can handle payments to independent contractors and other employees.  The cost is $25 per month after a free 30-day trial and two more months at $9.99.  Setting this up should only take 30 minutes.

8. Terminate the Independent Contracting Relationship

If your Independent Contracting Agreement has an early termination clause, it most likely has a "notice" requirement.  A notice requirement will usually state that the Agreement can be terminated with "X" days notice. The letter here can serve as that notice and can be sent via email or traditional mail.  Most likely in the technology industry, email will be more efficient.

Related Legal Forms and Guides

Need help hiring an independent contractor?

Post a Job on UpCounsel and Connect with Quality Employment Attorneys today who can help you properly hire an independent contractor.