So you started your business and hired a few independent contractors / 1099s. Even though this is very common, it is not necessarily OK. This post is going to explain the biggest mistakes employers make with independent contractors, how to be safe when hiring a contractor (or how to make adjustments), who should never be a contractor, and what will happen if the IRS gets involved.
First let’s identify what makes an independent contractor, or 1099 as some call it, so appealing. No tax liability and no benefit requirements are the biggest things. Many of my clients say, “I can’t afford a true employee yet”. And then they say, “I can let them go easily if it doesn’t work out”. This last statement is a misconception about contractors in general, because it depends on what is written in the contract. Sometimes firing a bad employee within an employment at-will state is easier than getting out of a contract.
Now let’s identify the biggest and most common mistakes made after “hiring” an independent contractor:
- Dictating specific tasks and details instead of outcomes. It is important to remember that contractors cannot be told specifically how something should be done, but what is desired. It is tricky at times.
- Providing training. A contractor should come in with the skills necessary to do the job.
- Onboarding and orientation as an employee. Of course you want to give the contractor an overview of the company and information necessary to do the job, but be careful here.
- Providing equipment. All contractors should work on their own computers, phones, etc.
- Defining set hours worked. An employee can be told their work hours, but an independent contractor has to be free to work hours they determine is necessary to get the job done for you as a client.
- Handing out policies and procedures, or an employee handbook. These are to be sent to employees only as a contractor does not fall under many of the policies described in the handbook.
- Paying through payroll as an employee. Some systems allow you to pay contractors as contractors on a different schedule.
How can you hire a contractor and be safe? (This also works for correction of any mistakes)
- Hire a company, not an individual. The individual can be a sole proprietor. If they have not created their own business yet, you can request them to do so before doing business.
- Ask for an invoice. If you plan on paying this person monthly, or per project, it is best to request an invoice for your records.
- Pay per project if applicable. This shows you are paying for an outcome or product.
- Do not provide tools to do the job. No computer, phone, car, etc.
Who should never be a contractor?
Someone who plays a key role in your business should be either a partner or an employee. Hiring a Director or Manager who is also an independent contractor, will raise some red flags. Contractors can consult, but should never supervise or manager others.
What happens if IRS finds out a contractor should be an employee?
You will be liable for back taxes, wages (if below minimum wage) and overtime (if incurred), and may be liable to provide benefits as provided to other employees.
Note: There are still a lot of grey areas when hiring an independent contractor. For additional information, visit the IRS website, and/or consult with an HR professional and/or employment lawyer.