You know you need extra help around the office, but you may be unsure whether hiring an independent contractor makes sense. Are you starting your own business and need a freelancer or other professional to help get you off the ground? If your needs don’t require adding an employee, hiring an independent contractor can be a great solution!

This guide will walk you through defining your project, describing the role to be filled, vetting & selection, negotiating the agreement, hiring & onboarding, and paying independent contractors. Plus, we will review documentation and reporting requirements for contracting organizations. Let’s get started!

Luck is what happens when preparation meets opportunity
Lucius Annaeus Seneca

BE PREPARED

Classify Correctly

One of the first things to consider when hiring extra help is whether to classify that worker as an employee or an independent contractor. Worker classification determines how a worker is taxed and can have significant implications for you and the contractor.

An employee is subject to the employer’s control of what work needs to be done and exactly how it must be completed. The employer often provides training, tools, and a place of work for the employee. Employees are typically paid a regular wage or salary and often receive health insurance, paid time off, and retirement savings benefits.

On the other hand, an independent contractor controls how the work will be completed and typically provides their own training, tools, and workspace. Independent contractors usually send invoices for their services and are paid on a per-project basis. Since contractors are not considered part of your regular workforce, you are not required to deduct taxes on their behalf or extend employee benefits to them.

For more information about why worker classification matters and how to do it properly, refer to How to Classify Workers: Employee or Independent Contractor?

If you choose to classify workers as independent contractors, it is imperative that you properly structure and document the relationship.

If you want to tell your worker HOW, WHEN, AND ALL THE OTHER DETAILS ON THE METHOD or MANNER of getting the job done, then you’re probably treating him/her like an employee
Tisha Dodge via Startup Greater Good

Create a Project Description

When hiring an independent contractor, it is essential to be as specific as possible in the description of the project. A project description should:

Describe the problem or opportunity and what the project will do to address it
Identify desired project deliverables or outcomes
Define metrics the parties will use to evaluate project success
Layout a timeline, including milestones and deadlines
Include your budget constraints for the project

Create a Role Definition

Like a job description you might write for an employee, the role definition will identify the characteristics needed for a worker to complete the project successfully. For example, the role definition could include a list of essential functions and the necessary qualifications, experience, and skills.

SELECT THE BEST

A businessman selects the best candidate from crowd

Identify Contractors

You can search for contractors that might fit the bill using your project description and role definition. Use your network when looking for a trusted contractor. Talk with other business owners about similar projects they may have undertaken. Ask your business advisors for recommendations.

Initiate conversations with several contractors and share your project description and role definition. Get a feel for their interest and fit for your project. After these initial conversations, you may be ready to ask your top candidates to produce an estimate of work.

Select Your Contractor

After identifying your top candidates and receiving some estimates, a follow-up meeting can be vital for the contractor selection process. It allows you to get to know each contractor, understand their experience solving similar problems, and determine if they are the right fit for your company.

Prepare before speaking to each candidate by developing a clear list of questions specific to your problem and their estimate. Remember to discuss payment terms and allow each candidate to ask questions.

For your top candidate, request their resume and references to verify qualifications. Checking contractor references is due diligence, like running background checks on prospective employees. After talking to references and considering the contractor’s qualifications, skills, experience, personality, and price, you may be ready to make your selection.

CLOSE THE DEAL

Negotiate Project Details

Typically, a contractor’s estimate will provide more detail than your original project definition document. You must negotiate and incorporate these specifics to develop an independent contractor agreement (contract). Project details will include an accurate and complete description of the following:

Problem definition, project scope, and goals
Services, tasks, and deliverables
Timeline, milestones, and deadlines
Billing information such as:
- Billing rates
- Payment milestones, frequency
- Invoice/payment terms, amounts, and limits
The amount of work expected from both parties

We’re all eager to move forward in business when the opportunity arises… However, don’t… throw caution to the wind and forgo the legal formality of putting your contract in writing.
Tisha Dodge via Startup Greater Good

Develop a Legal Contract

It is essential to have a written agreement with each independent contractor. The independent contractor agreement incorporates the results of your project negotiations into a legal framework that defines your business relationship. The contract ensures that everyone is on the same page as the project begins and provides guidance as the project moves along the path to completion.

Many contractors can turn their estimates into a statement of work or contract. Their contract can serve as your independent contractor agreement as long as the terms spell out the entirety of your relationship, not just the work details. Review their contract against your own and discuss any discrepancies before signing.

Alternatively, use your own independent contractor agreement and attach the contractor’s statement of work to spell out the project details. Ensure the agreement covers handling disagreements and what happens if either side breaks their end of the deal. A well-written contract can protect you and your business in case of disputes or legal issues down the road.

Sign the Contract

The traditional process of collecting (wet) ink signatures on a paper contract requires both parties to be physically present when signing. COVID-19 accelerated the use of eSignatures in both business and personal settings. Today it is just as common to use eSignatures to sign the Independent Contractor Agreement. A typical eSignature platform process:

Convert the document into a format defined by your eSignature platform
Prepare the converted document for signatures
Share the prepared document with the signers
Each party signs the document
The platform automatically shares the completed contract with both parties

MANAGE LIKE A PRO

Onboard Your Contractor

Now that the contract is signed, you need to perform some onboarding tasks to ensure a smooth start to the project.

Choose a Payment Method

You will need to identify a system to pay independent contractor invoices promptly. And since independent contractors are responsible for paying their own taxes, you should not withhold taxes for them. There are three methods of paying contractors:

Your accounting system pays contractor invoices through accounts payable
If using your payroll system, ensure you pay them as a contractor, not an employee
Or, utilize a business system designed to handle expense payments

Tip: Some systems may also automate the collection of onboarding materials and the generation of 1099s for contractors (your annual IRS tax reporting requirement).

Provide Access

As you bring the independent contractor on board, you must decide which of your systems they will use to work on your project. Consider systems such as customer relationship management (CRM), accounting, website, phone, email, file-sharing platforms, productivity, and communication tools. You must establish any necessary accounts and provide them with login credentials during onboarding. Remember that since they are not part of your regular workforce, contractors should only have access to the systems necessary for their project.

Start a File

You may have collected some items during contractor selection, but onboarding is your opportunity to gather any remaining materials. Each independent contractor should provide you with the following:

A business card
A resume or professional qualifications, and references
An IRS W-9 form, which is a request for taxpayer identification and certification
Additional documentation could include:
- The contractor’s website
- Any advertisement or promotional material you have received

Start a file for each contractor containing these items. This file helps document your relationship with the contractor and should be kept current with invoices and contracts for additional work. Additionally, this folder will provide the information required for your annual IRS filing.

Pay Your Contractor

Receiving an invoice from a contractor initiates the payment process:

Ensure that you’ve entered the contractor as a vendor in your selected payment system
Review and approve the contractor invoice:
1. You will need to check rates and amounts against the contract terms to ensure they are correct
2. Also, ensure that you have signed off on any deliverables marked as completed and ready for payment
3. Discuss any discrepancies with your contractor
Make timely payments using the system you have chosen

Tip: Contracting companies typically pay contractors through their accounts payable process. Do not pay contractors through employee payroll checks!

Monitor Progress

By monitoring your contractor’s progress and providing feedback, you can help improve their performance over time. Two-way communications enhance collaboration and allow for necessary adjustments as the project progresses. Establish meetings to:

Obtain status updates
Approve passage through project gates or milestones
Identify what is going well or needs improvement

Much as the contract ensures everyone is on the same page at the beginning of a project, open communication helps ensure that everyone stays on the same page as the project moves forward.

Prepare IRS Form 1099-NEC (Annually)

Business owners must keep track of payments made to independent contractors each year, and for each independent contractor paid $600 or more during the year, you must report the total amount spent on IRS Form 1099-NEC. Business owners must send the 1099-NEC form to each independent contractor and the IRS no later than January 31.

Note: The contractor file you created during onboarding will provide the information necessary to complete this task.

You should maintain a contractor’s file for the entire time they are engaged on projects and for at least three years afterward. In addition, keep financial records like invoices and accounts payable ledgers for at least seven years. Finally, you should keep employment tax records (W-9, 1099-NEC) for at least four years.

DO IT AGAIN

Rinse and Repeat

Suppose additional work has been identified when your independent contractor completes their assigned project. In that case, you will need to go through project definition, negotiation, and contract development again to establish the new scope of work. Getting started on a new project with an existing contractor should take significantly less time than selecting a new contractor.

However, if you want to consider other contractors for the new project, you must repeat all or part of the contractor selection process.

Summary

It can be tricky to navigate the laws and regulations around hiring an independent contractor, but with the proper steps, it can be done smoothly. We’ve assembled this guide to help make the process easier for you. And if you’d like to dive deeper into hiring independent contractors, please check out the resources listed below!

Note: This post is intended to provide general information only and is not tax or legal advice.

Sources

Whether this is a problem you are currently facing or just something that has been weighing on your mind, feel free to contact me via phone or email so we can discuss your situation, goals, and solutions.

I built my first career in management consulting and have spent the last 20+ years using my passion and skills in community and economic development. For the past nine years, I have advised hundreds of start-ups and small businesses.

A Business Owner’s Guide to Hiring an Independent Contractor

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