Are you trying to break into a new market but can’t yet hire a permanent staff? Perhaps you are developing a new product line that needs a temporary hand. Most business owners will hire a contactor at some point in time. It’s a great way to cut costs if you know where you stand. Here are some general guidelines to help you avoid a 1099 mishap.
Understand the Difference Between an Employee and a Contractor
Simply put, an employee is a worker on your regular payroll. He or she receives an annual W-2 tax form and is usually a permanent member of your staff. An independent contractor is someone you hire to perform temporary work. This is not to be confused with a temporary employee. You probably work with a contractor if he or she does any of the following.
- Provides a unique or specialized service or skill
- Works with more than one client
- Earns a living by doing temporary projects
- Pays for all of the expenses of your project
- Advertises his or her own services or skills
- Pays all his or her taxes as a self-employed individual
Have a Solid Contract in Place
Detail your entire proposal on paper, and be sure to title it “Independent Contractor Agreement.” Otherwise, you will probably lose an IRS audit. Be specific when wording your work requirements, payment terms and completion times. Far too many disputes arise because of vague wording or a simple misunderstanding. It’s also a good idea to set fixed compensation terms. Otherwise, the IRS can argue whether or not the contractor is actually an employee.
Write Must-Have Phrases Into Your Agreement
Being specific means utilizing key phrases within your written contract. You should be clear about the following provisions.
- You will not provide benefits.
- You will not withhold federal taxes.
- All terms of the agreement are confidential.
- The contractor will not solicit side business from your clients or employees.
- The contract may terminate due to poor work, violation or late delivery.
- You assume ownership of all work performed under the agreement.
Understand IC Tax Protocol
As the employer, you are required to issue a 1099-MISC form when you pay an independent contractor $600 or more during a single tax year. You get a deduction, but you have to submit copies to the IRS and the contractor.
Be Fair and Cooperative
Hiring an IC is a cost-effective way to expand or develop, but the process can get messy if either party is negligent or dishonest. The law does provide you with some guidelines for working with certain professionals, such as real estate agents. In most cases, however, your contractor is the one who has the upper hand. For example, suppose you’re the managing partner at a CPA firm and you hire an independent electrician to rewire your office. Suppose you also require company training and insist that the contractor work specific hours using your own equipment. This situation could be construed as an employee relationship. If it escalates into a dispute that is settled in the contractor’s favor, you’re looking at fines, back taxes and further costs. Even if everything goes smoothly and everyone cooperates, you will still raise eyebrows at the IRS. Internal revenue agents have dealt with far too many disputes between employers and contractors. Just be prepared for an audit whenever you hire outside work.
When in Doubt, Seek Legal Advice
If you’re having trouble drafting a contract or you’re confused about taxes, contact a lawyer who specializes in labor laws. IC agreements can escalate quickly, and you don’t want to be left holding a penalty charge and a half-finished project. Hiring temporary help can be a lucrative business move if you know where to start and how to hold the cards.
The content on our website is only meant to provide general information and is not legal advice. We make our best efforts to make sure the information is accurate, but we cannot guarantee it. Do not rely on the content as legal advice. For assistance with legal problems or for a legal inquiry please contact you attorney.