How do I build a team to support my business?
Whether you hire employees to provide service to customers, or personally handle service, sales, or production, building a team to support your business can make all the difference. For many small businesses, the expense of hiring an accountant or other service professionals as an employee can be prohibitive. Hiring these types of workers as independent contractors, however, can yield big benefits.
An independent contractor works for themselves, another person, or business outside a formal employee-employer relationship. They often possess specialized skills or knowledge and may charge a flat fee per project, or by the hour. Independent contractors can support your business without you taking on additional overhead costs. You typically do not have to pay workers’ compensation insurance, health insurance, payroll taxes, or overtime.
There is a tradeoff, however, about the type of work they can do and what you can demand in terms of their time, and when, where, and how they get a project done. Contractors and freelancers generally set their own schedules, use their own tools, and maintain other clients.
What kind of independent contractors can I find for my small business?
Many services provided by independent contractors are not needed on a full time basis. Companies may not need a full-time, in-house bookkeeper or legal professional, for example. Instead, independent contractors typically provide on-demand services from time to time, allowing companies to keep costs down. It is common for small businesses to hire the following types of independent contractors:
- Creative freelancers (writing or graphic design).
- Bookkeeping or accounting.
- Social media managers.
- Marketing or market research.
- Web or app development.
Independent contractors are flexible, self-employed team members who help things run smoothly when they are needed. They can work remotely or in person depending on your project.
How are independent contractors different from employees?
Legally, employees and independent contractors differ. While some might perform similar work, they are classified differently when it comes to labor laws, benefits, and taxes. The way each is classified depends largely on the type of work they do, rather than how an employer chooses to classify them. In fact, if employers hire a contractor that legally would be defined as an employee, the employer can face serious legal consequences.
The following lists highlight the differences between independent contractors and employees:
- Employers are not responsible for tax withholdings. Contractors are responsible for their own taxes.
- Employers do not provide any benefits.
- Employers have less control over schedule and workload.
- Contractors are not subject to mandates like minimum wage, worker’s compensation, and labor laws that protect employee rights.
- Contractors are typically employed on a temporary or conditional basis.
- Payment terms are dictated by contract.
- Contractors typically utilize their own equipment.
- Contractors may have other clients.
- Employers must withhold income tax, Social Security, and Medicare from wages.
- Employers provide benefits like health insurance, retirement, paid leave, and more for full-time employees.
- Employers may control schedules and workloads.
- Employees are subject to mandates like minimum wage, worker’s compensation, and other labor laws.
- Employees are typically employed on an ongoing basis or for a specific time period.
- Employees receive regular wages, or salary.
- Employers provide equipment and workspace.
Full-time employees usually have only one employer, although some may moonlight or work on the side in unrelated industries. Independent contractors, however, tend to have multiple clients in the same industry.
When it comes to taxes, since contractors are not employees, small businesses do not have to issue a W-2 or withhold payroll taxes. Instead, small businesses provide freelancers with a Form 1099 (sometimes called a Form 1099-MISC or Form 1099-NEC) for tax purposes, provided that the freelancer made over $600 that year.
If you hire an independent contractor instead of an employee, it is a good idea to have an Independent Contractor Agreement that spells out the relationship in detail to avoid misclassification issues.
How can my business avoid misclassification?
Just because you call a worker an independent contractor, that does not automatically mean they are not an employee. Some businesses are tempted to classify full-time employees as independent contractors to avoid having to pay employment taxes and health care costs. Misclassification is a violation of the federal Fair Labor Standards Act and state employment and labor laws. It also may violate IRS rules and regulations.
To ensure that workers are classified correctly, determine whether contract workers are truly independent. You should ask yourself the following questions:
- Does the company control when the contractor works and for how long?
- Does the company supply equipment and supplies to help the worker do their job?
- Is the worker paid hourly?
- Does the agreement with the worker continue indefinitely?
- Do you require that the worker only work with you and no one else?
- Do you have a Noncompete Agreement with this worker?
If you answered yes to any of these questions, you might have a potential misclassification issue. Remember, most independent contractors are self-employed. The relationship between your company and the independent contractor should be based on a project or a set period of time. If the employer decides when and how work is performed, it is more likely that the worker is really an employee. If you only need the worker for a set period of time, you can create an Employment Contract that only lasts as long as you need.
How do I protect my business when hiring an independent contractor?
Unfortunately, some companies misclassify workers who are really employees as independent contractors. As a result, they violate wage and employment laws, which can lead to costly legal actions.
In some cases, an independent contractor may claim that they are an employee, which exposes the company to federal and local labor law penalties. A comprehensive Independent Contractor Agreement with any freelancer can help protect your business.
You may want to include the following terms when drafting an Independent Contractor Agreement:
- A description of the work or project the freelancer will be performing.
- A description of the project deliverables, including timeline.
- A description of the payment terms, including amounts, methods, and deadlines.
- Non-Disclosure Agreements and related terms.
- A list of intellectual property and how it will be treated.
These descriptions may not be as general as a job description for an employee. Instead, this contract specifically describes the project and may include precise information and dates for when the relationship begins and ends. An Independent Contractor Agreement can also state that both parties understand that they are not creating an employee-employer relationship through the agreement, however, an agreement cannot get around legal misclassification issues.
If you have more questions about misclassification or distinctions between independent contractors and employees, reach out to a Rocket Lawyer network attorney for affordable legal advice.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.