Hiring an independent contractor — sometimes referred to as a 1099 contractor, freelancer or consultant — can be a good value for your business. Independent contractors are responsible for paying their own taxes, and can save you on insurance, benefits and training costs.
As small businesses look for ways to scale their businesses and do more with smaller staffs, they’ve turned more and more to independent contractors. A recent SurePayroll survey found that 22 percent of small business owners are more inclined to hire an independent contractor than a full-time employee.
Who are these independent contractors? They could be anyone from a marketing specialist running a specific campaign, to a tech guru that comes in to work on your computer network. Or maybe you need help with a lengthy administrative or data entry task, and you have someone working on it offsite.
In many cases, small businesses are realizing they don’t have to hire a full-time person, and pay for the benefits and payroll taxes that come with that hire, to get certain things accomplished. While some independent contractors may charge a higher hourly rate, in the long run they allow business owners to save money.
Keep in mind, though, that independent contractor payroll comes with its own set of unique requirements and complications. Refer to the red box in the chart above for some of those requirements.
As a small business owner, you have to be very careful that you’re meeting the Internal Revenue Service criteria when hiring an independent contractor. If you’re going to classify them as such and report them as a 1099 on your payroll taxes, you can’t treat them the same as a regular employee. This means you don’t control their hours or require them to follow certain internal procedures. The IRS can also look at any number of factors that might suggest they’re an employee, such as whether or not they go through a formal training, if they work on the premises of the business, if their business expenses are paid – all factors that could indicate they’re an employee rather than an independent contractor.
Independent contractors are typically free to work for anyone they like; take on the risk of profit or loss for their work; and are paid by the job rather than by the hour.
It can be a blurry line, so employers may choose to file a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, which allows the IRS to make the determination for you.
The most common contractor payroll form is the 1099-MISC, which you’re required to file if you pay a contractor more than $600 in a year. This can be a chore for the small business owner, as it means manually sending each contractor you hire during the year their 1099.
This is another reason why a payroll service can be helpful in allowing the small business owner to pay contractors online all at once, as well as having the 1099 forms prepared on their behalf.