Whether you’re a small start-up with no employees or a larger company just dipping its toe into the “gig economy,” here’s what you need to know about contracting with a freelancer.
What Is an Independent Contractor?
Unlike a full-time, part-time or temporary employee, independent contractors are ultimately in charge of their own work. They:
• Accept tasks on a case-by-case basis and can turn down offers of work
• Have more than one client
• Set their own schedule
• Use their own personal method for doing the work
• Supply their own tools
Taxpayer Identification — IRS Form W-9
This is the independent contractor equivalent of the Form W-4 that employees use. You should obtain a filled-out Form W-9 from the independent contractor before work begins.
Income Reporting — IRS Form 1099-Misc
Whenever you pay an independent contractor more than $600 total for the year, you must report that income to the IRS, just as you do on Form W-2 for regular employees. The due date for sending copies of it to the IRS and the contractor is January 31 (with some exceptions).
If your company’s accounting system requires a purchase order to buy goods and services, you should also use it with your independent contractor. You may wish to specify that the P.O. # be included on the contractor’s invoice, for easy matching against the info in your system.
Keep your Accounts Payable system running smoothly by requiring that independent contractors submit an invoice for work completed — whether their personal invoice or that of online freelancers or payment platform. You should not be billed for expenses such as equipment and mileage (those are part of the contractor’s business overhead, not yours). And check that the work listed on the invoice matches what you agreed to.
Contract for Work
You may also want to draw up a written contract specifying the scope, quality, and timeframe of work you are purchasing from the independent contractor. That way, you can avoid disputes over what each party’s obligations are. Plus, when you work consistently with a freelancer, it’s easy to fall into the habit of informally requesting little additional jobs — and forgetting that you’ll be billed for them. A contract will help limit that behavior.
As more and more of the workforce moves into non-traditional job roles such as independent contracting, it’s likely that you’ll utilize this type of labor at some point in the life of your business. Xendoo stands ready to help you navigate this unfamiliar territory with guidance on taxes, cost controls, and more.