Wednesday, November 5, 2008

How to work with independent contractors

Hiring the right people is invaluable to your small business. But with staff come lots of expenses. So why not hire out? In other words hire independent contractors. This is often a good solution especially in cyclical or seasonal businesses. But working with independents requires an understanding both of the law and the unspoken rules of engagement.

The general rule is that an independent contractor relationship exists if you can control the result of the work but not the means and methods of accomplishing the result. This is really, really important to understand because it affects not only the legal side of how you deal with independents, but also how you or any of your employees deal with independents.

If you're not sure if you're working with an employee or an independent review these questions:
  • Is there risk of profit and loss to the individual?
  • Does the individual provide his or her own work location, tools, and equipment?
  • Does the individual have control over when, where, and how he or she will work?
  • Does the individual incur non-reimbursed expenses in the completion of tasks?
  • Is the individual free to provide similar work for others?
A friend of mine is a freelance HR recruiter. She's been going through hell with her current contract who can't seem to understand what her status means. It's a written 6 month contract that they keep extending. But they don't understand that they can't require certain things such as attending last minute meetings or answering email while she is in India on vacation. What they can expect is for her to complete assignments on-time and at a level of quality that benefits them. It's important to know to understand that independents are typically free to set their own rules.

Another distinction is in benefits and taxes. Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independents. You also do not typically provide any health or other benefits to independents.

You can't have it both ways either. If you try to classify an employee as an independent contractor the IRS could get on you and you may be held liable for employment taxes for that worker See Internal Revenue Code for more information.

Independent contractors can be great for your business. The right relationship can bring you quality work without the legal overhead. And if you understand the limitations of the agreement (i.e. you can't always require them to work when it's convenient for you) than it can be a win-win for all.

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