independent contractor requirements &saving money on taxesby FitSmallBusiness.com

Why would you want to hire independent contractors?

• No FICA Taxes• No Unemployment Insurance Tax• Potentially Lower Worker’s Compensation Cost• Bottom Line: Hiring people as independent contractors can save your business money!

Why wouldn’t you want to hire independent contractors?

• In some cases you legally cannot. The IRS provides guidelines for classifying workers. If you m i s c l a s s i f y e m p l o y e e s a s independent contractors, you can face fines up to $15,000 per instance or criminal persecution.

• You have to give up certain rights to control or direct the person’s work. For example, you cannot tell an independent contractor when to start and stop working.

• It can be the morally wrong thing to do. If a person works exclusively for you and cannot pursue other opportunities, you are cheating them out of money by classifying them as an independent contractor.

What are the paperwork requirements for independent contractors?

• For independent contractors that are US residents or citizens, you will need to fill out a W-9 Form. If you pay them more than $600 per year, you are required to issue independent contractors a 1099-MISC .Here are the Instructions for W-9 and 1099-MISC

• For contractors outside of the United States, you should establish the contractor’s foreign residence. This can be accomplished by having the contractor fill-out a W-8BEN form.

Here are the instructions and a good article.

Independent Contractor or Employee?

There are three general guidelines for figuring out how one should classify a worker:

1) Control - How much control does the person have over how they do their job? If the person has a great deal of discretion over how to do their work this is considered an independent contractor.

2) Financial Arrangement - Is the “profitability” of the job determined by the worker? If there is no financial variability in the “profitability” of the job, then he or she is considered an employee.

3) Business Relationship - Does the worker have a contract with the company, or receive benefits? An independent contractor will tend to have a contract, while employees will tend to receive benefits.

If you hire and pay the contractor through a Freelancer site like Freelancer.com, Enlace.com or Odesk you can almost classify the person as an independent contractor.

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