Guide to Hiring Independent Contractors

Hiring independent contractors can be a great way to get help for your business. That’s especially true if you’re not ready for the commitment and extra responsibility of hiring employees.

But how do you get started? And what are your responsibilities for hiring an independent contractor? In this guide, we’ll cover the essential considerations for hiring independent contractors so you’ll be set up for success.

Considerations for Hiring Independent Contractors

The most important difference between hiring an independent contractor over a traditional employee is how they’re treated for legal and tax purposes. Let’s walk through some of the key considerations you should make. That way, you can set up a thriving independent contractor relationship. 

Accounting for Differences Between Employees and Independent Contractors

Independent contractors operate independently because they enjoy the freedom of being their own boss. When you hire an independent contractor, you’re their client — not their boss. You can set expectations for the job you want done (and some aspects of how you want it done). But you can’t dictate the exact terms of how they do it.

For example, you typically can’t tell them what hours of the day to work or when they can and can’t take time off (like you would in an employment relationship). They also get to set their rates, not the other way around.

If you’re working with available talent and you’re unsure if they’d be defined as an independent contractor or an employee, IRS Form SS-8 can help. It’s called the “Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding” form. The employment status line between freelancer and employee can be vague, so the IRS can help make the call for you.

Understanding Employment Laws and Regulations

When you hire an employee, you’re required to maintain workers’ compensation insurance, pay unemployment insurance taxes, and so on. You also have to comply with state laws for paid time off, lunch breaks, and other legally mandated benefits.

But when you hire an independent contractor instead of an employee, you aren’t required to provide those benefits.

Managing Payroll Taxes and Benefits

Unlike hiring employees, you’re under no obligation to pay employment taxes or make income tax withholding for an independent contractor. The freelancer takes responsibility for those. All you have to do is pay them the agreed-upon rate, and then they’ll pay self-employment taxes on their own.

Likewise, you don’t have to provide them with paid time off, retirement plans, or any other employment benefits. That can keep your overhead costs much lower.

How to Hire Independent Contractors

Step 1: Define your needs and requirements

Decide what projects you want your independent contractor to handle. Maybe you’re hiring a freelancer to build a business website for you. Or perhaps you’re looking for a social media expert to handle your social platforms. Maybe you’re an artist hiring a photographer for regular product photography.

Defining exactly what you want your freelancer to accomplish will help you find the right person for the job. You’ll also be able to clearly anticipate your expectations, when you hope to have the project finished, and more. And of course, you’ll want to establish your budget for the project.

Step 2: Find potential candidates

Locate freelancers who can take on a project like yours. There are quite a few places to find an independent contractor with the skills you need. Some talent agencies have lists of “member” freelancers who are available for work. You might even be able to find independent professionals through platforms like LinkedIn or other social media.

Other sure-fire methods are independent job board websites like Upwork, Fiverr, Contra, Freelancer, Guru, and more. Some of these sites even streamline the process, making it easier to pay the contractor, track their work, and more.

Step 3: Evaluate candidates

Weigh the pros and cons of each candidate. Hopefully, you’ve connected with a good number of independent contractors who are interested in working for you. Now’s the time to decide which is the best fit for your business. In one sense, this decision is a lot like deciding which person to hire for an employee position. You’ll want to evaluate their prior work, their related qualifications, and if they “click” with your mission.

But on another hand, you can’t dictate the exact terms of your hire, such as the rate you’ll pay or what “shift” they’ll work during the day. Each freelancer gets to set those terms. You’ll have to balance these areas; the “cheapest” freelancer might not be the best (and the most expensive one might not be the best, either!) for your business. Be prepared for a little flexibility on that front.

Step 4: Draft an independent contractor agreement

Write up a contract that will govern your work arrangement. Much like you would write up an employment contract for a standard employee, you’ll want to create a contract between your business and the freelancer you’re hiring. However, since you’re hiring an independent worker, you’ll have to collaborate with them a bit to draft this agreement. And if you can’t agree on the right arrangement, that’s a good sign you need to find another freelancer.

Typically, an independent contractor agreement can include a good number of terms:

• How much the freelancer will be paid
• The project(s) they’ll complete
• Who will own any intellectual property
• If the work can be featured in the freelancer’s portfolio
• How long the work will last (can be indefinite)
• Terms for terminating the agreement, if needed

Every independent contractor agreement looks a bit different, but if you routinely hire freelancers, you might want to create a template for your repeated use.

Step 5: Onboard and train the contractor

Prepare the independent contractor to work with you successfully. Depending on your project, this step can be simple or complicated. For example, if you’re hiring an individual contractor to clean your building, you’ll want to set up their tax forms and payment methods, show them the building, explain where to get any keys they need, describe what areas are off-limits during certain times, and so on. But if you hire a person to create a new website, you’ll brief them on your company mission, give them access to brand photos and videos, and more — all on top of the clerical tasks like paying them.No matter what, you’ll want to set your work relationship up for success. Get their W-9 Form on file so you have their tax forms in place, finalize payment details, and discuss any essentials the freelancer needs to succeed.

Step 6: Manage the contractor’s work

Oversee the contractor’s work as needed. Managing a contractor’s work looks different than managing an employee’s work, but you’ll still want to keep track of things. You can’t tell a contractor specific hours of the day to work, but you can still assign deadlines or milestones for their work. You can also assess their work periodically.

Terminate the agreement (if needed)

“Terminate” sounds like a harsh word, but in terms of independent contractors, it’s not always a bad thing! Sometimes when your project is finished, you won’t need that freelancer’s services anymore. Of course, there are also contexts when you might “fire” a freelancer, too. For example, if their work is shoddy or routinely late, you might decide it’s time to terminate the agreement.

When that time comes, you’ll need to formally terminate the agreement (ideally in writing), pay any remaining balance, and move on to what’s next.Note: You don’t necessarily have to terminate an agreement at a set point in time. You can create agreements for long-term work with independent contractors, as long as both parties are willing.

Best Practices for Hiring Independent Contractors

If you’re thinking of hiring some independent contractors for your LLC, follow these best practices to make each project a success.

Developing a Comprehensive Hiring Process

We all know the saying, “Failing to plan is planning to fail.” Before you even start looking for a freelancer, create a plan. Decide what tasks you want to outsource, how much impact it can have on your budget, and the process you’ll use to solicit proposals, interview potential freelancers, and so on.

Creating Clear and Detailed Job Descriptions

The best way to attract the right freelancer for your job is to clearly explain the job you’re hiring them for. It’s very similar to writing a job description for standard employment. You’ll want to clearly delineate all the project entails, if it’s on an ongoing or project basis, if you accept remote workers, and any qualifications or certifications you’d like to see.

Using Standardized Contracts and Agreements

There’s a decent chance you’ll use freelancers more than once during the lifespan of your business. To successfully manage each hire, it’s helpful to use standardized contracts and agreements each time and customize them. By using a contract template, you won’t waste time drafting new contracts from scratch.

Establishing a System for Tracking Time and Expenses

Many freelancers charge by the hour for their services, and you might need to reimburse your contractors for certain expenses. For example, if you’re hiring a contractor to remodel a space, you will have to reimburse them for lumber, drywall, paint, and more. If you’re paying by the hour, you might use the honor system or a time-tracking tool.

Any approach is valid, but you’ll want to have a system in place. That will help protect you, the freelancer you work with, and both of your business efforts.

We can help!

Navigating business can be challenging, but you don’t have to go it alone. Here at ZenBusiness, we’re in your corner, navigating the red tape of entrepreneurship so you don’t have to. Whether you need help starting an LLC for $0, maintaining a registered agent, staying compliant every year, or anything in between, we’ve got your back. Learn more about the definition of an LLC here.