How to Hire a Contractor in California
Hiring a contractor? This step-by-step guide details the actions you'd need to take in order to legally hire the right contractor for the project. 9 min read
Understanding how to hire a contractor in California is necessary if you need help with an important business project but don't want to hire a full-time employee. 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.
A Guide on How to Hire an Independent Contractor in California.
An independent contractor is someone who does work for your business but isn't actually a company employee. Virtually every business makes use of contractors at some point, and while hiring a contractor may seem simple, you actually need to be very careful so that you can make sure you're getting the right person for your job. Fortunately, by following a few simple steps, you should be able to easily find a quality contractor that will help your company succeed.
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 that manages the relationship between a company and an independent contractor. Among other things, the agreement should establish:
- An independent contracting relationship
- Ownership rights in any work product
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 are 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 carve-outs either party can add to the NDA. Carve-outs 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 in the 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.
Amendment to Independent Contracting Agreement
Often, throughout the lifetime of an 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
You should report the use of an independent contractor when:
- The independent contractor is NOT a corporation, general partnership, limited liability partnership, or limited liability company (but rather an individual or sole proprietorship).
- If you paid the independent contractor $600 or more OR entered 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 that 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.
Basics of a Home Improvement Contract
If you're hiring a California contractor to help with a home improvement project, you must be sure that the contract you use includes the correct information. Contractors must follow strict rules when writing a contract for home improvement services, and these rules cover everything from how the contract should be formatted to what information it should include.
Many of the rules that apply to writing a home improvement contract are required by law, and in some cases, your contractor cannot even begin work on your project until you have been provided a copy of the contract that both you and your contractor have dated and signed. Some basic information that should be added to a home improvement contract includes:
- The contractor's name, address, and licensing number.
- Contact information and registration number of the home improvement professional who sold you contracting services, if applicable.
- The date the contract was signed and instructions for sending a Notice of Cancellation.
- A notice stating the contractor will offer the homeowner a full release from liens and claims for work that has been paid for by the homeowner.
- A special change order that will be used if the contractor needs to complete extra work or changes need to be made to the project.
- A notice stating that the contract must be filled in completely and signed by both parties.
In addition to this basic information, a home improvement contract must include several pieces of information related to the specific contract. For example, the total that the contractor will be paid for their services should be included in the contract. The contract should also describe when the project should begin and the date when work should be completed.
If the contract will include any finance charges, these should be listed separately from the contract amount to prevent confusion. A full description of the project should also be included. This description should cover the work that will be performed and the materials that will be needed to complete the project. You may need to provide additional details if the project includes construction of a swimming pool.
Homeowners should be aware that down payments for a home improvement contract cannot exceed 10 percent of the contract's total value or more than $1,000. Every home improvement contract should include a statement notifying the homeowner of this restriction. The contract should include a schedule for progress payments. This schedule should include the following information:
- The amount of the payment.
- The work that will be completed.
- The materials and equipment needed to complete the scheduled work.
Home improvement contracts should also contain notices that explain requirements for commercial general liability insurance and workers' compensation insurance. Other notices that should be added to your home improvement contract include:
- A notice informing the homeowner that they can require the contract to obtain a payment and performance bond.
- A notice that covers information related to mechanic's liens.
- A notice that explains the rights provided by the Contractors' State License Board.
Your home improvement contract may also include information about whether you will have the ability to cancel the contract and how the cancellation process should proceed. Every homeowner signing a home improvement contract should be aware that contractors cannot force you to pay for work that has not been finished. Contractors are also not allowed to request money for materials that they have not yet received.
Tips for Hiring the Right Contractor
When hiring a contractor in California, you want to make sure you find a professional who has the skills necessary to complete your project and will offer you the best price possible. Fortunately, by following a few simple tips, you should be able to find a contractor who meets your precise needs.
First, you should be sure that you get bids from at least three contractors. Make sure you understand how each contractor reached their estimate and ask for clarification if you're confused about the price you have been quoted. Understand that the lowest price is not always the best, and an estimate that's considerably lower than other quotes is a cause for suspicion.
Second, be sure that you thoroughly review the contract before signing. Look for a full description of the work that will be completed, including what materials the contractor will use. You should also be sure that you understand your right to cancel the contract. In California, home improvement contracts must include a provision that gives the homeowner three days to cancel the agreement. The exception to this rule is only for contracts that cost less than $750 for materials and labor.
If you're planning to spend more than $500 on your project, you should carefully research licensing for the individual contractor or contracting business you are thinking about hiring. Licensing information can be checked with the Contractor's State License Board.
California requires that all home improvement contracts inform homeowners of their rights and legal protections. The state also requires that contractors obtain a license for the specific type of work they offer. When hiring a contractor, check their license to make sure they are legally allowed to perform the work for which they have been hired.
Related Legal Forms and Guides
- One-Way Non-Disclosure Agreement
- Independent Contractor Agreement
- Independent Contracting Amendment to Statement of Work
- 1099-MISC Form for IRS
- W-9 Form for IRS
- Consulting Assistant Confidentiality and Intellectual Property Assignment Agreement
- Notice to Terminate Independent Contracting Relationship
- Report Use of Independent Contractor with California (optional)
Need help understanding how to hire a contractor in California? Post a Job on UpCounsel and Connect with Quality Employment Attorneys today who can help you properly hire an independent contractor.