Thinking about hiring an independent contractor for extra support for your business?
Hiring independent contractors is a popular option for LLCs looking to access specialized skills and services without the commitments and costs associated with hiring employees.
But can an LLC legally hire independent contractors?
LLCs can hire independent contractors as self-employed individuals who work on a contract basis.
However, LLCs must understand the regulations for hiring independent contractors to ensure legal compliance.
Read on to learn what goes into hiring independent contractors as a Limited Liability Company (LLC) and the key steps to follow when hiring.
Who’s Considered an Independent Contractor?
An independent contractor is a self-employed individual who provides services to a company or organization on a contract basis.
Unlike an employee, an independent contractor is not entitled to the same benefits or protections, such as minimum wage, overtime pay, and insurance coverage.
Independent contractors are also responsible for their own taxes, insurance, and other expenses related to their work.
As non-employees, they have more autonomy and control over their work, including; when, where, and how they perform their services.
What’s the Difference Between Employees and Independent Contractors?
To make a clear distinction, here are three common rules by the Internal Revenue Service (IRS) that differentiate employees and independent contractors.
This pertains to the existence of the right to direct or regulate how the worker carries out their tasks. If a business possesses such authority, the worker in question can be classified as an employee. The business doesn’t need to exercise this power, as long as they have the right to do so.
The financial rule considers whether the worker is financially reliant on the employer. If the employer is the worker’s primary income source, they are more likely to be considered an employee. If the worker has other income sources or works with other clients, they are more likely to be classified as an independent contractor.
The type of relationship determines how the contractor and company perceive each other. If the worker has a long-term relationship with the employer and provides critical services to the employer’s business, the worker is more likely an employee. However, if the relationship is short-term and the worker performs non-essential services, the worker is likely to be considered an independent contractor.
Note that these rules are not conclusive and that each case is evaluated on its own merits. If a company or contractor wants to distinguish the difference in legal ties legally, they can fill out an SS-8 form to determine the contractor’s work status.
How to Hire Independent Contractors in 6 Steps
Now that we have discussed what independent contractors are and how they differ from employees, it’s important to consider how to properly hire independent contractors for your LLC.
Here are six (6) steps to follow when hiring independent contractors for your LLC.
1. Do the Recruitment or Referral Process
The recruitment or referral process involves identifying and locating potential independent contractors who can provide the services your LLC needs.
This can be done in a variety of ways, including job postings, referrals from other professionals, or industry associations.
Once potential candidates are identified, the LLC can evaluate their qualifications and experience to determine whether they are a good fit for the job.
2. Create a Written Contract
The contract should outline the scope of work, payment terms, schedule, and any other important details related to the project such as legal terms.
The contract should also include provisions for confidentiality, intellectual property ownership, and dispute resolution.
After the contract is drafted, it should be reviewed and signed by both parties to ensure that they understand and consent to the terms of the agreement.
3. Let Them Complete Form W-9
The LLC should give the independent contractor the W-9 form and ask them to complete and return it before any payments are made.
This will help ensure that the LLC has accurate information for tax reporting purposes and may avoid penalties for incorrect or missing information.
You can find the Form W-9 on the IRS website here.
4. Send Them Forms 1099-MISC or 1099-NEC
Once the independent contractor completes Form W-9, the LLC is responsible for issuing Form 1099-MISC or Form 1099-NEC to the contractor.
These forms report the total amount of compensation paid to the contractor during the tax year and are used for tax return purposes.
The LLC must give the contractor a copy of the form and file it with the IRS. The type of form used will depend on the type of payment made to the contractor.
Form 1099-MISC is used for most types of payments, while Form 1099-NEC is used for non-employee compensation.
5. Provide Them With IRS Form 1096
After the LLC has issued the appropriate 1099 to the independent contractor, it must also file Form 1096 with the IRS. Form 1096 is a cover sheet that summarizes the information reported on the 1099 forms.
The LLC should also include a copy of each Form 1099 issued to the contractor along with Form 1096 for submission.
6. Keep Detailed Records
Keeping detailed records is crucial in proving compliance with tax laws and regulations, and resolving conflicts or addressing any problems that may emerge with the independent contractor.
This involves keeping track of all the payments made to the contractor, including contracts, invoices, receipts, and other relevant documentation associated with the services provided or projects undertaken.
Furthermore, detailed records enable you to evaluate the performance of the independent contractor and make informed decisions about future hiring needs.
How to Prove That You Have Hired Independent Contractors
Once you have completed the six steps mentioned above, it is time to provide evidence that you have indeed hired an independent contractor for your LLC.
To prove you have hired independent contractors, there are several ways to provide proof of their status.
Here are key methods to help you prove that you have hired independent contractors:
- Written Contract: Having a written contract demonstrates the independent contractor status of the individual or company you have hired. This document should outline the terms and conditions of the project or services to be provided, as well as the compensation to be paid.
- Proof of a Real and Separate Business: This might include items such as a business card, letterhead, or a business license.
- Invoices: These invoices should include the contractor’s name and contact information, the services provided, the date the services were initiated, and the amount charged.
- Form W-9: This form requires the contractor to provide their name, address, and taxpayer identification number (TIN). The form is used to report payments made to the contractor to the IRS.
- Freedom to Be Hired by Others: It’s important to show that the independent contractor has the freedom to work for other clients or companies. This means that they are not exclusively dependent on your LLC for work and income. Evidence of this may be the contractor’s marketing materials or other documentation showing they provide services to multiple clients.
Advantages of Hiring Independent Contractors
Although there is a lot of paperwork to complete before the actual job, there are many benefits to hiring independent contractors.
Some of these benefits include:
- Flexibility: Independent contractors offer businesses the efficiency to quickly and easily scale their workforce to respond to changes in demand or new projects.
- Cost-Effectiveness: Independent contractors are responsible for their own expenses, such as insurance, equipment, and tax obligations — relieving the employer’s obligation to pay for them.
- Specialized Expertise: Independent contractors often have specialized skills or expertise that can benefit a business. This can include specific technical or creative skills, as well as experience in particular industries.
- Reduced Liability: Businesses are not responsible for providing independent contractors with benefits, paying expenses, or complying with labor laws that apply to employees. This can help to reduce a business’s liability and legal exposure.
- Increased Productivity: Independent contractors are often highly motivated to complete their work efficiently and effectively, as they are typically paid on a project or task basis.
Factors to Consider
When hiring independent contractors, it’s important for businesses to consider several factors that could impact their legal obligations and potential risks.
Some of these factors include:
- Misclassification: If a worker is misclassified as an independent contractor when they should be classified as an employee, there may be legal and financial consequences for the company — including fines and penalties.
- Control Over Work: Companies must be careful not to exercise too much control over the work of an independent contractor — this could be taken as evidence that the worker is an employee.
- Contractual Obligations: Independent contractor agreements should be carefully drafted to ensure that both parties understand their respective obligations and expectations and that the agreement is legally enforceable.
Key Considerations for Hiring Independent Contractors
Hiring independent contractors can be a great way for businesses to access specialized skills and expertise while keeping labor costs under control.
However, it’s important to carefully consider the risks and potential legal liabilities associated with this type of arrangement.
To ensure that your business is keeping accurate records and meeting its tax obligations, consider our bookkeeping services here at doola.
Designed to help small and medium-sized businesses stay on top of their finances, our team of experienced professionals can provide the guidance and support you need to navigate the complexities of independent contractor arrangements.
Contact us today to learn more!
Can a US company hire a foreign contractor?
Yes, a U.S. company can hire a foreign contractor.
How do I hire a contractor outside the US?
Hiring a contractor outside of the US involves additional considerations, such as understanding a country’s labor laws, tax regulations, and legal compliances. A foreign contractor must also fill out IRS form W-8BEN to certify the contractor is not a U.S. citizen.
How do I write an independent contractor agreement?
An independent contractor agreement typically includes details such as the scope of work, payment terms, timeline, and a Non-disclosure Agreement (NDA).