Your accounting department needs extra help to handle the year-end crunch. Your software developers need additional personnel to launch your new product on deadline, but the company has a hiring freeze in place. You need help with a demand generation campaign or new web site copy, but don’t have the expertise on staff. All these scenarios, and more, are good reasons to bring on independent contractors to get the job done.
Qualified independent contractors can help you fill in the gaps in almost any department in your organization when the need arises—whether it’s covering positions during a hiring freeze or getting a key initiative out the door. Using a contractor enables you to bring on individuals with the expertise to quickly jump in and complete a project or take on a task without training, equipment expense, or any long-term commitment. Although you will typically pay contractors a higher hourly rate than employees doing the same work, you’re not providing benefits, worker’s compensation, insurance, Medicare or unemployment taxes, so, in many cases, the total cost could actually be less expensive, and require far less administrative work, than a comparable employee.
The legal ramifications
It is critical that your organization properly identifies employees versus independent contractors, particularly if the contractors are doing the same work as some of your staff. The key differences between an employee and an independent contractor, as defined by the IRS and the U.S. Department of Labor, center around these three categories:
- Behavioral: Contractors control how their work is done.
- Financial: Contractors typically pay for their own tools, supplies and business expenses, and pay a self-employment tax
- Type of relationship: Contractors have a written contract, and do not receive employee-type benefits like pension, overtime, insurance or vacation pay
All contractors should be required to submit a W-9 form, which includes a Taxpayer Identification Number (TIN) or social security number prior to the start of work. Your accounting department will need to report any income they’re paid over $600 to the IRS. The W-9 also verifies that your company, in most cases, is not responsible for withholding taxes.
Using staffing agencies vs. going direct
Organizations can either work with staffing agencies to help source their independent contractors or contract with freelancers directly. There are general staffing agencies for more administrative work, and others that specialize in specific types of freelancers, including creative/marketing talent, accountants or IT professionals.
The upside to using an agency is that you can get the talent you need in place more quickly. They perform the background checks and vetting, and typically pay the contractor on your behalf. However, you’ll be paying the agency a percentage of the contractor payment for their work, so of that $100 per hour you pay for contractor X, the only $70 per hour may go to the actual contractor. So, you may not always get the most seasoned, top-tier talent. Although every agency’s contract is a little different, if you want to use the contractor at a later date—or even offer that person a full-time job—you will still have to go through the agency, and pay a conversion fee for any future employment.
You can also opt to work through websites, like Upwork, that consolidate profiles from freelancers worldwide, which enables you to browse by need and experience. Then, they act as an intermediary between the contractor and your business.
Finally, organizations also have the option of finding and contracting with freelancers directly. Most contractors who work directly with clients have their own website containing portfolios of their work and a rundown of their skillsets, as well as a strong presence on professional networks, like LinkedIn, and other social sites. Spend time looking at the quality of their work and qualifications, and invest time in speaking to their references, as well as the actual contractor, to find the best fit for the project at hand.
As with most things, one of the best ways to find the right freelancer or independent contractor is to get referrals from your own network. Or, one of your employees may have worked with a great freelancer at his or her previous employer. All options worth exploring.
Budgeting for and paying independent contractors
If you’re hiring an employee, you typically offer them a salary. However, independent contractors are private businesses that set their own rates, which can vary from individual to individual, from location to location, and by specialty. In many cases, this rate varies, based on the complexity or scope of the project or type of work you need.
Contractors can be paid per hour or per project, depending on your need and their business model. For example, if you need a six-page website created, coded and launched by “x” date, the contractor will give you a bid or statement of work, and commit to completing that work under those parameters for that amount. In this sort of engagement, they’ll work at their own office, on their own schedule, using their own processes and deliver your project by the agreed upon date. You won’t be overseeing the project or its progress, or determining how the contractor completes the work.
In many ways, the process is much like dropping clothes off at the dry cleaner and picking them up when they’re done. It’s a turnkey process.
If you want people on site or want them to fill in at your office in some capacity for some length of time, you could have more of a managed services agreement, for a pre-determined period of time, for a pre-determined hourly rate. If you’re working with a staffing agency, they can speak to you directly about market rates, how and how often they invoice, and their terms and conditions. Often, they will pay the contractors directly every week, and send you a bill at month’s end.
Independent contractors you hire directly will be paid by your company, based on predetermined terms, which is typically Net 30 days. Some contractors, if they’re working on large projects, will require a prepayment upfront, or payment at specific milestones, like 35 percent on contract acceptance, 35 percent on project delivery and 30 percent upon project approval.
The freelancers will invoice you, and your accounting department will pay by ACH, wire transfer or check, although some freelancers accept other forms of electronic payment like PayPal or Zelle. Those that work with smaller companies and startups may even accept credit card payments.
You can also choose to pay your contractors through automated payment platforms, payroll service providers or freelance management systems to keep your contractor payment totally separate from your employee payments.
At year end, your accountants will complete form 1099-NEC, which stands for non-employee compensation, and provide copies to the IRS and any freelancer you paid more than $600 in that tax year by the specified annual deadline.
Additional points to consider
If the independent contractors will be working with proprietary information, or helping you prepare for a product launch, it’s customary to have them sign an NDA, or non-disclosure agreement, a legal contract that protects any sensitive or confidential information from being discussed by the freelancer with any unauthorized party.
If your company will begin using independent contractors more often, consider having your legal department draft a supplier agreement that has the contractor verify that they are not employees, that they are entitled to no overtime, vacation pay or benefits, and that the rights to the work they produce are owned by your company. It should also clearly identify your payment terms, and how you’ll handle contract termination, if the relationship doesn’t pan out for either party. Any seasoned contractor Is used to signing both types of these documents.
Independent contractors can be great assets to organizations that need specialized services, want to increase output without adding headcount or need the flexibility to meet market demands. Setting up a process for working with and paying these contractors, and taking the time to build out a strong freelance network now can give your organization a competitive advantage in the years ahead.
