How to Hire an Independent Contractor
Don't confuse an independent contractor with a neighbor who uses a hammer and nails. An independent contractor is a professional freelancer working independently under an agreed-upon pricing or contract arrangement. The IRS has strict guidelines for independent contractors. Violate one of its requirements, and the IRS may see that person as an employee rather than an independent contractor. Ensure the proper paperwork is in place to avoid stiff fines, fees or penalties from the government. Independent contractors are not "hired" as they are not employees.
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Instructions
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Understand the guidelines under which the IRS qualifies independent contractors. The IRS requires that an independent contractor work on his own, provide a product or a service for a fee and not have any equipment supplied by the business. Companies cannot dictate to an IC how to complete a job. If your business provides office space for independent contractors, the IRS views these accoutrements as those of employees. Don't offer equipment, supplies or any other such amenities reserved for employees to an independent contractor.
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Qualify independent contractors before contracting with them to provide services. A qualification package consists of a W-9 tax form, a certificate of insurance request and an introductory letter; the package may also include a request for a bid for the proposed work. Do not contract with the IC until the paperwork is completed satisfactorily.
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Obtain a completed W-9 from the IC, along with any business articles of incorporation, business licenses, business cards, clientele references and website printouts needed. Create a file for the IC and keep this information on hand in case the company undergoes a tax audit.
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Request proof of insurance or certificates of insurance naming your company as the additional insured from the IC. Have the IC submit this along with the package he must fill out and return.
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Input proof of insurance, W-9 and other pertinent information into the company's computer and accounting system. Depending on the type of company the IC has, you may not need to report payments to the independent contractor. For instance, an independent contractor listed under the articles of incorporation with an "Inc." designation after its name may not require a 1099 tax document at the end of the year. To verify this, obtain copies of the articles of incorporation for the IC to keep in the IC file.
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Provide an agreement or contract to the IC that outlines the specifics of the work or services needed. Include a Scope of Work and pricing agreement that requires the IC to sign it and return to you. This serves as the "contract" for the work provided.
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Detail the payment provisions with which your company operates to the IC. Some companies pay vendors and contractors on a Net-10 or Net-30 basis. Ensure the IC understands how payments work so that she knows when she can expect to be paid.
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Provide the IC with a purchase order for the service to be performed. This serves as another means to verify the status of the IC.
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Assign work to the IC. Since independent contractors are not employees, they are paid after the work is completed satisfactorily. Do not treat an independent contractor like an employee. Such interaction may cause the IRS or state government to audit your firm and require your company to pay wages and back taxes if it considers the IC to be an employee.
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Tips & Warnings
Do not indicate to the IC that she can only work for your firm. Under IRS guidelines, this is prohibited. By nature, ICs are independent business owners who can have multiple clients at any one time.
Contracting with an IC without all the necessary documents in place can cause later problems. Ensure an IC file has a copy of any purchase orders, the W-9, the contracting agreement and more. Keep the file and records a minimum of seven years.
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