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Hiring an independent contractor is now a part of everyday business. 53% of hiring managers say that the pandemic increased their willingness to hire remote freelance workers and contractors¹. Independent contractors have become a key part of both small and large businesses.
This article includes what you need to hire an independent contractor and the key parts of the hiring process.
We also discuss how Wise business gives employers an easy way to pay their independent contractors without hefty conversion fees
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It can be difficult sometimes to understand the different areas of compliance that use must look to before hiring an independent contractor.
Let's take a quick look at some information you should prepare beforehand.
In short, no, you don’t need one.
The Federal EIN (Employer Identification Number) is your business’s unique identity code, through which the IRS can identify you for tax purposes. This number is used while filing your business’s income tax returns.
On the other hand, you may not always need an EIN to operate your business. For example, Single-member LLCs and sole proprietorships without employees, for example, are not required by law to have an EIN.
You can consult the IRS website to find out if you need an EIN.
Ensure that your business is registered with state and local authorities and following the proper guidelines. What is considered operating as a business within a certain location?
Typically, you’re considered to be doing business activities in a state when:³
- Your business has a physical presence in the location i.e, buildings or equipment.
- You are in the state when meeting with clients
- A large part of your earned revenue is from the state
- One or more of your employees work in the state
As a result of this business activities, you may be liable to file and pay taxes within the specific state or local tax jurisdiction.
An independent contractor is an individual or business that provides services to another company without having a formal employer-employee relationship.
They’re typically paid on a project basis, rather than receiving regular wages from one employer.
For example, a web designer may work with a company to create their website, but they aren’t considered an employee – they’re an independent contractor. And if you’re an American company hiring a foreign contractor in the UK, they would be responsible for their taxes and benefits as per UK laws.
In other words, an independent contractor is self-employed and not subject to the same legal requirements as a hired employee. When it comes to taxes, health insurance, and other benefits, the independent contractor is responsible for ensuring they are in compliance with local laws.
While the definition of an independent contractor may vary depending on location: there are a few ways you can differentiate them from employees:
- Can work for many companies at one time
- Non-essential, i.e., your business can operate without this person
- Not always available when you need them
- Don’t work the same amount of time as an employee (typically) and often work irregular hours depending on your agreement
- Are subject to less control from the hiring company
- Only paid for the cost of their labor
- More flexible with the ability to work on contracts at their own discretion
- Paid for specific projects or tasks
There are several methods for hiring an independent contractor for your business. You can use popular job boards, such as Indeed, Monster, and SimplyHired to find independent contractors.
You can also use websites, such as Upwork and Fiverr, to find freelancers and independent contractors for your business. Another option is to use job networking sites such as LinkedIn to find and hire an independent contractor, and they also have a job board function that you can utilize in your search.
If you’re wondering whether you should hire an independent contractor, there are some considerations to bear in mind when deciding whether it’s best for your business:
|Flexible – you can end and begin contracts as needed (e.g., for seasonal workers)||Independent contractors may not be available when you need them to be|
|You can save money overall as you only pay for the cost of labor||May need to plan hiring around independent contractor schedules|
|Independent contractors are generally highly skilled||May not work as many hours you might need, depending on commitments|
As you might see in the pros and cons above, the primary consideration for businesses hiring independent contractors is the distinction between their role and an employee’s role.
Understanding the difference between an employee and an independent contractor is crucial (You need an EIN to hire employees), as it will help you decide what you need most for your business.
|Works solely for your company||Can work for many companies at once|
|Essential to your business||Non-essential, i.e., your business could survive without this person|
|Always available, as they are a permanent employee||Independent contractors may not be available when you need them to be|
|Are subject to specific local rules regarding working hours||May not work as many hours you might need and might work irregular hours depending on your agreement|
|Under the direct supervision of the hiring company||Free from control and direction of the hiring company|
|Additional costs, such as training, equipment, taxes, etc.||You can save money overall as you only pay for the cost of labor|
|Ongoing contracts||Flexible – you can end and begin contracts as needed (e.g., for website design)|
If you are not sure how to hire independent contractors, consider your current costs, staff levels, and where you and employees may need support. Hiring an independent contractor may be a cost-effective solution to help your business grow or to offer employees more support with their work rather than asking them to take on more tasks.
Once you have decided to hire an independent contractor, the next step is to see what paperwork you need to hire an independent contractor. Here’s a checklist of the steps to ensure your hiring process goes as smoothly as possible.
When hiring an independent contractor, consider their location. Many independent contractors work remotely, which usually means that you may need a different type of contract depending on their location and any tax obligation your business may have. Whether the independent contractor is living abroad or located where your business is, you can use a freelance contract to solidify the agreement, ensuring that you have covered any key timezone differences and responsibilities the independent contractor has.
If you have hired an independent contractor that lives abroad and is a US citizen or resident, they will need to fill out Form W-9 before they can undertake work for your business. For independent contractors living abroad and that are not US citizens or residents, they will need to fill out Form W8-BEN. You should also check with independent contractors to understand if any other forms need to be filled out for tax reasons, depending on the country they are located in.
See how much you can pay your international contractor with Wise's transparent fees:
Step 5: Prepare a well-defined contractor agreement that meets legal requirements of your local laws and those of your contractor
Working with an independent contractor is different to hiring a full-time employee. As they are likely being hired to fulfill specific responsibilities and tasks, it is crucial to have a contract that includes all relevant details.
The contract should include the following information:
- What kind of tasks or role the independent contractor is being asked to do
- The time commitment needed (e,g., part-time, per hour, flat fee per month)
- Payment amount
- The length of time you are looking to hire them for
Important: Your independent contractor contract should also take into account any laws around independent contractors, both in your location and the independent contractors.
When putting together a contract for your independent contractors, a few different components should be included as part of the onboarding process. Here are some of the key documents needed when hiring an independent contractor:
Non-disclosure agreement/Confidentiality agreement
To protect your business and proprietary information, you should have the independent contractor sign a non-disclosure agreement and agree to keep discussions and work confidential.
If part of the tasks (or all) are to create content or some kind of product for your business, you should have the independent contractor sign the rights of ownership to you
Payment and billing terms
Independent contractors may have their own payment and billing terms, so once you agree to a type of method and form of payment (e.g., bank transfer once a month, bi-monthly payments)
If either you or the independent contractor deem that it’s not the right fit, having a termination clause in place protects both of you from continuing further.
As part of their onboarding, independent contractors should provide a filled out Form 1099-NEC for your records.
An independent contractor should give you an invoice with the following information:
- A work description
- Their rate
- Their bank account details for payment.
The Wise Business account is a great choice for businesses looking to pay independent contractors. Wise offers 40+ currencies to send and receive money in, making it easy for you to pay independent contractors with lower fees.
Batch Payments: You can also take advantage of batch payments, which help you to pay up to 1000 invoices in one click. This feature comes free with the Wise account.
Wise API: Wise Business has a free tool to help you automate and schedule payments to make your business more efficient. The coolest part is that comes free with your business account. This feature comes free with the Wise account.
|Some features Wise Business users love|
|Receive Payments like a local: Businesses can pay a one-time fee for accounts details in global currencies, such as USD, EUR, GBP, CAD, so they can receive money without any additional fees|
|Account Software Integration: QuickBooks, FreshBooks, Xero, Sage, and Wave|
|Team Access: Make your business run more efficiently by granting accesses based on job role|
|An International Account: Hold 40+ currencies at once|
|Transparency: Wise Business is trying to get rid of all your business account fees|
Wise is not a bank, but a Money Services Business (MSB) provider and a smart alternative to banks.
- Upwork - Future Workforce Report 2021
This publication is provided for general information purposes only and is not intended to cover every aspect of the topics with which it deals. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication. The information in this publication does not constitute legal, tax or other professional advice from Wise Payments Limited or its affiliates. Prior results do not guarantee a similar outcome. We make no representations, warranties or guarantees, whether express or implied, that the content in the publication is accurate, complete or up to date.
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