Hiring Independent Contractors: Are They Right for Your Business?

In today’s booming gig economy, it’s becoming more common for businesses to hire freelancers or contract workers instead of employees to supplement their existing workforce. Independent contractors can be brought on to fill just about any role within a company, from janitorial services to members of the C-suite.

Here’s the unique distinction: Independent contractors are self-employed and not considered a full-time employee of your company.

The pros and cons of hiring independent contractors

While this makes hiring freelancers attractive – knowing that the business is not responsible for additional overhead and equipment, payroll taxes, or benefits – you’ll also find some challenges and potential pitfalls that should be faced when you work with independent contractors. Here, we’ll go over a few of the pros and cons of making the decision to hire freelancers.

The 3 benefits of hiring a freelancer

1. They can be a great resource during crunch times – If you have certain times of the year when you’re extra-busy or if you’ve taken on new clients and need a helping hand with tasks so you can focus on business strategy, independent contractors can help. They can fill in the gaps where you need extra help. A freelancer can be a graphic designer, a writer, an accountant, IT support, an executive assistant, etc.
2. They save you money – Since these workers are not employees of the company, you’re not on the hook for paying benefits, state and federal taxes or worker’s compensation insurance. The independent contractor pays their own social security and Medicare taxes, as well as self-employment tax.
3. Frees up your employees to focus on other projects – When your employees aren’t weighed down by tasks and projects that are easily outsourced, they can focus more on supporting the business strategy, making the company more money.

The 3 downsides of hiring a freelancer?

1. Less control – The flip side of hiring someone as an independent contractor is that you lose the control that you have with your employees. For example, you can hire a graphic designer to create a corporate brochure, but you can’t tell them when to work on it or how many hours they must spend on it. You can require them to work onsite, but that can be a risky proposition if you start dictating the hours she should be in the office.
2. Lack of continuity – Even if you have a contract in place with a freelancer, they can always bail on you at any time. This could leave the status of that corporate brochure up in the air.
3. Risk of misclassification – This is the biggie when it comes to compliance with federal law. Is the person you just hired an employee or an independent contractor? If you have that freelancer working on-site, and you start dictating the hours she must be in the office as well as the software or methods she should use to create the brochure, you could be viewed as an employer. If you incorrectly determine whether a worker is an employee or contractor, you can really get into hot water with the IRS and Department of Labor (DOL).

Need help classifying employees? Check out this interactive worksheet.

4 tips to protect your business

1. Ensure employees and contractors are properly classified – Make sure you’re not exerting too much control as this could legally tip contractors into employee territory.
2. Have a contract in place – Contracts protect both you and the freelancer. Be sure you explicitly state in the independent contractor agreement that the working relationship is that of a business hiring a freelance worker. Be specific in the parameters of payment and deliverables. Include a non-disclosure clause to protect your company’s property.
3. Make sure to have W-9s on file – Always keep copies of Form W-9. If you work with a freelancer over a period of years, it’s okay to only keep the initial one (as long as the contract addresses the working timeframe), but it’s really best to request a new one each year.
4. Make sure to file 1099s for contractors who earn more than $600 a year – If you don’t, you could be in for a surprise in the form of IRS fines and penalties. And nobody wants that kind of heat.

Paycor can help

If you’re planning to hire an independent contractor, it’s important to take all the pros and cons into consideration. If you’re not sure about how to pay them or the potential compliance challenges surrounding hiring them, let’s talk. We’re an HCM software company with decades of experience helping businesses classify employees and freelancers in every industry.