4 Steps To Take Before Hiring An Independent Contractor
Dan Levenson July 29, 2015
The Internal Revenue Service defines an independent contractor as “a business owner or contractor who provides services to other businesses.” They are responsible for their own social security, taxes, and retirement and health insurance plans and are not entitled to company coverages. If you choose to hire an independent contractor, you have to stay on top of the regulations set forth by the government.
There are stipulations, both relating to taxes and penalties, set in place to maintain what an independent contractor can do, how they get paid, and more. There are specific documents that you need to obtain from the independent contractor(s), as well as documents that they need to fill out so you can remain within the realms of the law. Taking the appropriate legal channels and completing the correct forms is a safe business practice.
Prior to hiring, either during an in person or over the phone interview, ask the independent contractor for the following information; this step will help you verify their legitimacy.
- How long have they been in business?
- How is the business is structured? (Number of employees, partnership or corporation, etc.)
- What is their contact information?
- What licenses do they carry?
- Who were their previous employers?
- How did the contractor advertise?
- Is their office in a facility or at home?
- Does the contractor carry insurance?
After you’ve decided to hire a contractor, ask them for the following information, forms, and documents to verify if the contractor is legitimate.
- Hard copies of business cards, stationery, and any advertising records
- White pages listings
- Any aliases or assumed business names they operate under
- Professional licenses
- Certificates that prove insurance and liability
- Information on employees that work with them
- Copies of billing procedures
- Office rental lease
- Copies of IRS Form 1099-MISC that any previous employers issued to the contractor
- Hard copies of the contractor’s tax returns
Since the contractor works for your company on a service-rendering basis, it is vital to have a written contract stating the terms of agreement; this helps if there is ever a future dispute.
- A description of services
- Amount of pay, delivery method, and date of payment
- If the contractor is responsible for their expenses or if you will reimburse
- Whether you or the contractor provide materials and equipment
- A clause stating that you have both agreed to work together
- State what licenses and certificates the contractor holds
- Acknowledge that they are responsible for their own taxes, health benefits, etc.
- Length of contracted service
- Description of when you can terminate services
- Note that you are not responsible for any negligent actions of the contractor, as well as negating responsibility for any illegal activities that they might be involved in
Independent contractors are held within a different bracket when it comes to paying for their taxes. An employee shares the responsibility for social security and Medicare with their employer, where a contractor is responsible for it on their own. As a hiring professional within a company, you must provide the IRS with tax related forms for any independent contractors and employees that are working for you, and the documents are not the same. Keep them separate, but make sure to have all the documents filed so you don’t get audited or have to pay any unnecessary fees.
After you’ve finished the interviewing process, and have obtained all relative documentation, you should submit all necessary tax forms to the IRS within the allotted time period. Hiring an independent contractor allows you to have the services rendered that you require, when and how you require them. However, the government has strict rules on how the contractor works with you, and following these rules will keep you and your company safe from any kind of tax fraud liability.