Who are Independent Contractors?
An independent contractor refers to a self-employed person or an entity providing professional services autonomously on the basis of a contract. These independent contractors work or provide their services for multiple external entities as a non-employee over a short-term or per-project basis.
As a result, independent contractors, otherwise known as freelancers, are subjected to pay their own Social Security and Medicare taxes, voiding the hiring firm from potential liabilities.
Why Hire an Independent Contractor?
Independent contractors are equipped with a versatile skill set ready for your company. Their specialized skills mean you can assign them to projects where your workforce is lacking. This makes it easier for you to flexibly manage your company based on the demands of the season. Independent contractors excel in short-term projects and temporary assignments, bringing you more organizational flexibility for sudden growth.
Not only do independent contractors possess skills for the specified projects, but they also have their own resources and tools at their disposal. Technologies and networks you wouldn’t otherwise have access to can be provided by your independent contractors, minimizing your costs down the line.
Moreover, you are not subject to providing overhead costs for their taxes, social security, and tenure as they are classified as a different entity within your company.
Overall, great independent contractors support your business by opening up valuable time and resources for your full-time employees. With independent contractors, you’re provided with a resource of skills and experiences for either a temporary boost in workforce productivity or a solution to challenging projects.
How to Hire an Independent Contractor?
Hiring independent contractors is similar to hiring full-time employees, except for a few documents that would classify them outside of your regular employees. We listed a step-by-step process on how to hire an independent contractor
- Assess what your company needs in the short-term, mid-term, and long-term
- Develop a plan and strategy on how to market your job offer for your short-term and mid-term needs
- Write down and explain precise job roles and responsibilities to avoid confusion and scope creeping
- Find the most effective job board or social media network to post your job offering (e.g. Upwork, Freelancer, LinkedIn)
- Create a contract specifying terms and conditions (e.g. Non-Disclosure Agreements or Intellectual Property ownership rights)
- Consider getting the Employee Identification Number or Social Security Number (for the US, completing a Form W-9 is required for the classification of a 1099 employee)
- Interview, test capabilities, and check references
- Sign an independent contractor agreement
- Consider payment terms for the services
Paperwork for hiring independent contractors
Hiring independent contractors or sometimes called 1099 employees, are classified differently from full-time employees—their legal and tax compliances differ from one another. You need a different set of documents for hiring independent contractors.
For example, the US requires independent contractors to complete a Form W-9 to request the name and taxpayer identification number (TIN), social security number or employer (SSN) identification number (EIN) for tax compliances.
If you pay more than the income code (IC) of $600 or more, you’ll need to provide your independent contractor a Form 1099-NEC. The usual deadline to send the 1099 form to your contractor is January 31.
Independent contractors are responsible for filing their own withholding tax to local and federal authorities since they are not considered as your employee.
You can also partner with an EOR service to help you deal with the complexities of hiring internationally.
Check Credentials before Hiring an Independent Contractor
As a business owner, every facet of running a business takes risks, including hiring independent contractors. That’s why it’s so important to check the credentials of people you hire to minimize the risks of hiring the right independent contractor for you. Below, you can follow a general strategy on how to do background checks before pulling the trigger.
- Require educational background and work experience
- Contact previous clients of the independent contractor
- Hire third-party background screening providers for extra checks
- Identity verification
- Education verification
- Employment verification
- Criminal record verification
- If on a freelancing platform, check past recommendations and reviews of previous clients
- Require previous documentation regarding their relationship with their previous clients
Pros and Cons of Hiring an Independent Contractor
Before hiring an independent contractor, you have to understand its pros and cons. Below is a simplified list of what you can expect when hiring independent contractors.
- Reduced threat over maintaining legal liability
- Labour Cost reduction
- Cost-cutting on supplies and office space
- Access to international talent
- Ease of termination
- Retaining potential talent is tougher
- Risk of working with non-compliant contracts
- Paying global contractors
- Contractors consider their skillset as stocks
- PayScale is directly proportional to the work incurred
- Minimal Supervision
For a more extensive explanation of the pros and cons of hiring an independent contractor, click here.
Challenges Associated with Hiring Independent Contractors
Misclassifying employees for contractors
A significant liability for employers is misclassifying employees as independent contractors, especially while hiring them online. Misclassifying an employee exposes employers to federal sanctions and investigations, unexpected unemployment and workers’ compensation lawsuits, and state audits or penalties.
Penalty for hiring unlicensed contractors
Unlicensed contracting can either be considered a felony or a misdemeanor, depending on the federal or state laws of a country. You can be charged with heavy penalties. It is essential to check the documentation beforehand while hiring overseas contractors.
Hiring a contractor for your business without workers comp insurance
Such cases could leave you to pay an injured contractor's medical bills indefinitely along with the lost wages while being unable to work. This expense is not covered under any insurance since the contractor does not have workers’ comp insurance.
Limited flexibility over the work schedule
Unlike employees who work dedicatedly for a firm, contractors are independent and have the liberty to decide how best to perform a task assigned to them.
Ownership of work
While hiring contractors to work on products subject to copyright restrictions, the ownership of the final product belongs to the contractor unless there is a written agreement transferring the copyright ownership from the contractor to the employer.
Employers use contractors for relatively short-term projects since their availability is non-commital, especially when hiring overseas. This can be a minor or major inconvenience for employers who prefer a steady relationship with their contractors. In such cases, hiring an employee instead of a contractor is better.
Hiring Independent Contractors Internationally
Hiring independent international contractors or 1099 employees (as called in the US) has similarities with hiring locally. However, different countries require different compliances when hiring internationally.
For instance, in the UK, you don’t need to fill up documents to declare your hire as an independent contractor, but you need to follow the IR35 rule opposing disguised employment. On the other hand, the US requires your contractor to submit a Form W-9, and you have to provide a 1099-NEC form when paying more than $600.
In other countries, independent contractors may be classified as freelancers, entrepreneurs, sole proprietors, etc. These terms may hold distinct classifications within their respective borders leading to misinterpretation of the type of employee you employ, which can cause you headaches in the future.
That’s why it’s important to understand the legal requirements, employee classification, and tax compliances in each country to best know which documents you need.
Multiplier for instance, is an international company that hires remote employees all throughout the world. We have an employer of records situated in 150+ countries with subsidiaries to help you hire independent contractors from the country of your choosing. We have 100+ legal experts to aid you in legal and tax compliance. Everything here is bundled up in an accessible and easy-to-use SaaS platform.
Practical Considerations when Hiring International Contractors
Here are some practical considerations you should think about when hiring international or 1099 contractors.
Take their references seriously
Consider their previous clients’ experiences and feedback to manage your expectations with them.
Integrate Candidate Recruitment Management (CRM)
Include in your hiring system an effective CRM to monitor their performance and tasks
Consider payment schedules
Pay them on time so that you will be a reliable client for them
Write your contracts carefully
Make sure that your contract explains NDAs, service agreements, schedules or any other documents thoroughly for easier legal compliance.
Make use of video-conferencing, cloud-based platforms, and CRM systems so you can work online and let them be part of your team anytime and anywhere.
When not to Hire Independent Contractors
There are certain situations where hiring full-time employees are more beneficial than hiring independent contractors, as listed below.
While nurturing a pilot team
Developing your first pilot team relies on full-time employees to establish organizational habits and culture for your company. Stability is needed when building the foundations of your company. You need serviceable employees to be able to push your company’s growth forward.
With independent contractors, you’re setting a precedent for fast employee turnover and a shaky start. It’s best to hire independent contractors to support your main workforce rather than contractors be your focal team.
While training employees with a long-term vision
The same goes when training employees for the long term. You don’t want to train your contractors for the future since their main task is for the short or mid-term goals. Looking to the future requires stable and reliable employees loyal to your company.
Remember that independent contractors are only there for either specific projects or specialized tasks to help supplement your workforce. You’re better off training fresh graduates to build your future.
How does Multiplier Help You Hire an Independent Contractor?
Multiplier is a hi-tech platform that assists you in finding, hiring, and managing international contractors across the globe. Multiplier hires worldwide to help your company find the best fit independent contractors in the job market.
Our platform provides EORs, PEOs, payroll management, and other compliances you need for hiring internationally without a hiccup.
Connect with our business consultants at Multiplier today to find the best independent contractor for you!