Many businesses have discovered the benefits of hiring independent contractors. Unlike permanent staff members, contractors may be used only as needed. Whether you run a small business or a large company, this could help to significantly cut costs. Such workers may offer special capabilities, which can save a business the cost of training employees to learn those skills. Also, businesses are not required to pay certain taxes that they must pay for employees. This reduces paperwork and administrative hours.
If you are considering using independent contractors for your business, the following tips could help you to save time and money.
What’s the Difference?
Before you decide what kinds of workers you will use, you will need to understand the difference between employees and independent contractors. The primary difference is that employees work on a permanent basis for your business and are on a consistent payroll, while contractors are separate from your company. Generally, an independent contractor owns his or her own business and provides services to multiple businesses.
The Matter of Taxes
The IRS is very particular about how workers are classified, so be sure that you do this properly with regard to tax forms. You are responsible for giving a W-4 form to your employees, and they cannot legally receive their first paycheck until they complete it and return it to you.
When you hire contractors, you must have each of them fill out and sign a W-9 form before they may legally provide services to your business. Your business is required to report total payment of over $600 or more annually for each contractor, and you do this via a 1099-MISC tax form. You should provide this form to the contractor by the end of January in the year following the work year being documented. You will also need to complete a Form 1096, which, along with the 1099 form, must be sent to the Social Security Administration by the last day of February following the work year.
Other Important Documents
You should also have contracts in place for contractors. These contracts don’t need to be complex, but they should clearly define the terms of your working relationship. In case you are audited, you might also wish to keep a copy of each contractor’s specific qualifications and resume on file.
How to Pay a Contractor
Your business is not required to withhold income taxes from contractors; however, there are a few exceptions to this rule. If a contractor has not provided you with a taxpayer identification number (which can be a Social Security number), then you should then withhold income taxes. To view other possible exceptions, you should consult the IRS website or your tax preparer.
Since you generally won’t need to withhold any type of employment taxes, you would simply pay an independent contractor per job or on an hourly basis.
Hiring independent contractors could be a beneficial strategy for your business. If you need assistance in covering payroll or with any kind of financing for your business, contact Purevue Capital today.