Companies hire contractors for all sorts of reasons. Sometimes, they have short-term projects or part-time work that doesn’t warrant hiring a new employee. They should take care to only work with qualified contractors that fit their budget. The recruiting process is similar to that of hiring employees, except that it’s not as regulated.
If you’re looking for a service to help you with onboarding and hiring independent contractors, consider Zenefits. The service will send your contractors a registration link, so they can enter their own information, like Social Security or Tax Identification Number, in addition to an electronic copy of the payment agreement. You can also pay them through the app and both deactivate and reactivate their access within seconds. Sign up for a free demo today.
Steps for Hiring a Contractor
Hiring a contractor is much like hiring an employee. You need to have a firm understanding of the job you want to be performed and decide what qualifications are required before getting started. Pricing is a significant factor, so determining an acceptable range at the beginning of the process will prevent you from wasting time considering those who aren’t in your budget.
Once you know what your needs are, you can begin searching for contractors. Deciding where to search sets the stage for this step, and it primarily depends on the type of work you have available. For instance, you’d look for bookkeeping, virtual assistant, and roofing contractors using different platforms.
After receiving a few bids for the job, you’ll interview the best contractors and negotiate a price before making your final decision. In the end, you’ll extend an offer and a written contract. When it’s time to pay, a good payroll software will make processing payroll much easier than doing it manually.
Here are the steps you’ll follow when hiring independent contractors.
1. Plan Out Contractor Projects
Before you make any major decisions about hiring contractors, consider whether you really need them or if an employee would be a better fit. Sometimes employers are penalized for misclassifying employees as contractors. Take time to evaluate the projects you need help with. Is it long-term or short-term? Can one contractor handle the job, or do you need multiple?
“New York is one example of the many states that don’t want employers to avoid minimum wage laws by drafting independent contractor agreements that circumvent them. All W-2 employees must be paid a minimum hourly wage.
“There are several factors the courts will look at to determine whether an independent contractor agreement is, in fact, a disguised employee-employer agreement. Factors include whether the person works from the main office, resources supplied to independent contractors/employees; and direct delegation of tasks.”
—David Reischer, Employment Attorney & CEO, LegalAdvice.com
Generally, the best work for contractors is temporary and doesn’t require years of company-specific experience. Contractors usually have multiple customers, so if you have a long-term project that requires a full-time work schedule, you should consider whether an alternative option would be more feasible than using contract labor. Cost, expertise, and convenience are all important factors.
2. Determine Contractor Qualifications
After verifying that you need a contractor, and identifying the work you want performed, determine the qualifications you need in a contractor. Be sure to separate preferences from deal breakers. For instance, if you’re looking for a bookkeeper to “clean up your books” because you haven’t had the time to do it, consider whether you want the person to be certified or have a degree. Typically, bookkeeping certification would be a preference, while experience would be a requirement.
Independent Contractors’ Education & Certification
Certain jobs have higher qualifying standards than others. For example, if you need contractors to perform electrical work, you’ll want them to be licensed. When the work can have fatal consequences, you should always look for candidates who have documented education, certification, and/or a license; this minimizes your liability. With a little research, you’ll find that most of these industries, including the power industry, are already regulated so you’ll need to verify your contractor’s credentials.
Another industry example for which you’d want to verify credentials is accounting. If you’re looking for someone to help with your finances or taxes, it’s a good idea to set high standards. Financial information is confidential, and any IRS dealings need to be handled by a contractor you can trust. The certified public accountant (CPA) designation is a good credential to check for, but a college degree could work if the contractor has significant experience to prove expertise.
Contractors’ Work Experience
Work experience is a deal-breaker for most companies. It’s hard to spend money for work you’re not confident will be done well. Of course, how much experience depends completely on your preference and the work you need to be completed. If you need a roofing contractor to inspect the roof of a building you’re considering purchasing for your business, you’ll want someone with years of experience. Buildings usually cost at least $100,000, with which is too costly to gamble.
On the other hand, if the work you need completed has less severe consequences, like freelance writing, and you run across contractors with limited to no experience who fit your budget, you might be inclined to try them out. In this case, companies would typically assign a test project before committing to a long-term contract to ensure the contractor is a good fit for the work. Although wasting money is never good, it’s much easier to replace $100 versus $100,000.
Contractors’ Work Schedules
Another factor that might be important to you is the contractor’s work schedule. How much availability do you need your contractor to have? Although you can’t legally dictate a contractor’s work schedule―or you could face taxes and penalties from the IRS―you can consider how much capacity each contractor has before working with them.
Some contractors who are starting their business may only have one or two customers, which means they have more time to devote to your project to finish quickly. Others who have been in business for years might have to juggle your work with that of 20 other customers.
If you’re anxious about how much time your contractor will spend working on your project, consider using a free scheduling tool like When I Work. You can’t force the contractor to work the schedule you want, but you can request that they plan it in advance so you can track.
3. Write a Job Description
Figuring out what you need and want in a contractor will help you create a solid job description that saves you time by primarily attracting your target candidates. It’s disappointing to sift through a list of contractors that can’t perform the work you have or don’t meet the qualifications. This is why it’s so important to be direct when writing your job description.
Here are the most important items you should include in a job description:
- Job details: Provide detail on what the job entails.
- Required credentials: If you require a degree, license, or other credential, include it so contractors who don’t qualify won’t even apply. If it’s a preference rather than a requirement, state that so you don’t miss out on eligible candidates.
- Length of job: Estimate the length of time you expect the job to take. If you’re looking to build a long-term relationship over a series of projects, express this in the job description.
- Ideal contractor: It’d be helpful to spell out what your ideal contractor is like. You can list traits like adaptable, charismatic, and so on.
- Company profile: Include a brief description of your company with details on the industry it’s in and clients it targets.
Pricing is an important detail that governs the owner-contractor relationship. However, it’s not always a good idea to include it in the job description. When you’re ready to request quotes from the contractors you’re interested in, you may want to negotiate.
If you’ve already listed a price in the job description, you will likely have a hard time lowering it because the contractors will fixate on the amount you published. When contractors who normally charge less than the price you publish run across your job description, they won’t have any reason to reveal the lower price to you.
If you’re interested in posting your contract work on a job board, consider Indeed. You can search, schedule interviews, and negotiate offers, all on the website. Indeed will also help you price the work you’re contracting based on your location and the job type. Create an account today to get $50 in free job postings.
4. Search for Contractor Candidates
When the time comes for you to begin your contractor search, you’ll need to carefully consider where to look for the particular type of contractor you need. There are numerous avenues you can use to search, but you should definitely take advantage of the internet as it’s convenient and offers a wide reach.
If you’re in need of a freelancer—to build an app, create a website, or design a logo, for example—a freelance website would be a good option. The best freelance websites are affordable, easy to use, and offer a broad range of talent. Many of these websites, such as Fiverr, will allow you to post job descriptions on which freelancers can bid, and some sites will vet the freelancers for you.
With Google, hiring independent contractors is much easier than it was a couple of decades ago. You can enter a search for specific contractors in your local area easily. Enter the type of contractor you’re seeking and include your city and state.
Word of Mouth
The age-old approach of finding contractors through word-of-mouth is still popular, and it works. If you receive a recommendation, it usually means the person who has given you the recommendation had a good experience working with the contractor. As long as the contractor fits the qualifications you laid out at the beginning of the process, and you trust the person recommending him or her, you should at least be comfortable adding the contractor to your “to be considered” list, if not hiring the contractor outright.
5. Compile Applicant List & Screen for Best Candidates
As you proceed through the process of hiring a contractor, start compiling a list of eligible candidates. You should be able to eliminate some contractors before doing any major evaluation. Always refer to your qualification list and job description to keep you on track, because it’s easy to become sidetracked when reviewing dozens of candidates.
Be aware that some contractors will look great on paper but aren’t exactly what you need. They may have more qualifications than the job requires and hence exceed your budget. On the opposite end, you’ll find some deals that look very attractive financially, but the contractors’ experience may be questionable.
Once you compile your list, filter it for the candidates that fit your profile of an “ideal contractor” for the job. If you struggle to find ideal candidates, screen for the next best.
6. Request Quotes From Each Remaining Contractor
Once you know which contractors you’re willing to work with, you can home in on pricing. By the time you reach this step, you’ll most likely already have insight into the amount each professional charges. It’s up to you whether or not you want to negotiate; you should wait until setting an official meeting with them before starting the process.
Be cautious of quotes that are too high or too low. At this point, you should know what the average professional charges for the type of work you have. Any quotes significantly outside of that range could signal a red flag. Compare all prices and consider factors such as experience and contractor business structure before drawing any conclusions. Eliminate any contractors that don’t fit.
7. Interview Top Independent Contractor Applicants
Similar to scheduling a job interview, you should set up a meeting or call with the top independent contractor applicants. Three is a good number to consider but add more if you want additional options. Use the meeting to assess the contractors’ capabilities and compare your findings with the research you’ve already gathered. Be sure to ask all of the questions you need to be answered during this stage, so you’re ready to make a decision shortly after.
Questions to Ask Contractors
Here are the questions you should ask before hiring independent contractors:
- Have you worked on any similar jobs before? How did it turn out?
- How long do you estimate the job will take?
- Do you have any special licenses or certifications that pertain to the job?
- Will you have other workers helping you with the job? Do you carry workers’ compensation?
- What other type of business or liability insurance do you carry?
- Do you have any references?
- Do you require a down payment, or can I pay what I owe once the job is complete?
- I know you charge $__, but will you accept $__?
Here’s what Sandi Webster, co-founder of Pandi LLC, looks for when hiring independent contractors:
“When I’m hiring independent contractors, I want them to be an entity besides solo entrepreneur using their Social Security number. To work with my company, you must have at least an LLC [limited liability company], preferably not using the contractor’s name, business cards, and a LinkedIn page. Having a website is a plus, but not a must. These are the things that the IRS looks for to see if they fall into the independent contractor category or if I don’t want to pay the taxes and benefits for them.
“I do feel having insurance is important—workers’ compensation and liability. I pay the insurance for my contractors, but most companies do not. If an independent contractor is working for a company that doesn’t pay their insurance—and most don’t—they should have their own insurance, which is very expensive. If a contractor does not want to get his or her own LLC, then I insist they give me a copy of their insurance and 99% of the times, they cannot supply it because it costs a lot. If a contractor falls on one of my projects, I will be the one who is getting sued.”
Attributes to Look for in Contractors
Here are characteristics you want to look for when hiring independent contractors:
- Honesty: Do your best to verify the information they provide.
- Enthusiasm: A contractor who is excited about working with you will likely do a better job than one who’s not.
- Knowledgeable: Ask questions to test their expertise. You can request a preliminary analysis of the project.
- Flexible: Sometimes, work doesn’t flow as planned, either on the owner’s side or the contractor’s. You can get a feel for a contractor’s adaptability by their responses to your questions. If they’re willing to work with you on certain details of the contract, they’ll likely carry that attitude throughout the relationship.
- Organized: Contractors may be managing multiple projects aside from yours, so organization is key. Consider using project management software like monday.com, to help with planning and tracking your projects.
8. Extend An Offer & Prepare Independent Contractor Agreement
Hopefully, by the time you reach this point, your only problem is having too many good candidates. Regardless, you’ll need to make a decision as to which contractor you’ll hire and prepare to extend an offer. Please note that extending an offer to a contractor isn’t as official as extending one to an employee. It’s typically a verbal offer that states information like the price you’ll pay, work performed, and due date. Most importantly, it doesn’t carry legal obligations.
Once the contractor accepts your offer, you should prepare an independent contractor agreement. It will contain all of the details you discussed when extending the offer in addition to a confidentiality agreement and documentation on how to resolve issues should a disagreement arise. For the contract to be legally binding, both you and the contractor must sign it. It’s best not to begin working with any contractors until a fully executed (signed) contract is in place.
Federal Laws on Hiring a Contractor
One of the best parts about hiring independent contractors is the lack of extensive regulation. Hiring employees subjects employers to numerous laws but working with contractors is much less complex. Depending on your state, you may have to report new contractors to a state agency. Your primary concern should be ensuring that your contractor is indeed a contractor and not an employee. You shouldn’t dictate how or when the contractor works, only what the final product should be.
Penalties for Misclassifying Independent Contractors
Penalties for not complying with federal laws can be costly. The IRS is very sensitive to contractor-employee misclassifications and will search for those occurrences when conducting audits. If the IRS discovers you misclassified any employees as contractors, the contractors are automatically reclassified, and you may owe back payroll taxes (15.3% for Social Security and Medicare (FICA) and possibly 20% for income taxes), penalties of $1,000 per misclassified worker, and a year in prison.
“We had a client who hired subcontractors on a regular basis to use the client’s equipment on assignment in the metro area. One of them, when they were no longer getting jobs from the client, went and filed for unemployment. The State Unemployment Department decided to immediately audit the client and then levied taxes, penalties, and interest charges on the client.
“We represented the client, first administratively, then to an administrative law judge, and finally to a Rule 13 Hearing with the Unemployment Commission itself. At the Rule 13 hearing, we were able to prevail. We showed that the client met the criteria to classify his workers as independent contractors and not employees. We got all the taxes, penalties, and interest abated. The next January 1, the client switched everyone to employees so as not to ever have to go through such an ordeal again.”
—Charles Read, President & CEO, Get Payroll
Be sure that you’re not setting your contractors’ work hours or controlling how they perform their work. Otherwise, they should probably be employees. It’s also a good idea to check whether your state has specific contractor classification tests like California that you can follow to ensure you are in compliance.
New Hire Reporting for Independent Contractors
Federal law doesn’t require new contractor reporting, but some states do. These states match the reports up against their child support records to locate parents, establish a child support order, or enforce an existing order. The states that require businesses report independent contractors are California, Connecticut, Delaware, Iowa, Maine, Massachusetts, Minnesota, Michigan, Nebraska, New Hampshire, New Jersey, Ohio, South Carolina, Tennessee, Texas, and West Virginia. All laws differ, so it’s best to check your state’s website for specifics.
Federal Laws on Paying Independent Contractors
Generally, federal law doesn’t require you to withhold any taxes from the money you pay your contractors. However, if you’re unable to gather their Social Security number or tax identification number, you’ll need to withhold 24% from each payment to remit for taxes.
The IRS requires you to collect your contractors’ identifying information, like name, Social Security number, and address—usually on Form W-9—at the time of hire so you can file the 1099 tax form at year-end with ease. The 1099 reports all contractor earnings for the year. You’ll send a copy to each contractor, the IRS, and your state tax agency. This ensures the tax agencies are aware of who should be paying their own taxes.
Frequently Asked Questions (FAQs) About Hiring a Contractor
In this article, we discussed how to pay an independent contractor. However, we realize that you may have additional questions, and we’ve worked to address them here. If you have a question that’s not on our list, feel free to share it with us in our forum, and we’ll provide an answer.
How do I hire a contractor?
The process of hiring independent contractors begins similarly to the process of hiring an employee. You’ll identify the work that needs to be completed and decide on the qualifications a contractor needs to perform the job successfully. If you opt to post a job on a website, you should prepare a job description. Then compile a list of interested contractors and screen the top applicants.
After selecting the contractors who’ll proceed to the next stage, you’ll request quotes, set up interviews, and prepare to negotiate pricing. Once you make your selection, you’ll extend an offer and prepare a written contract prior to the contractor beginning any work.
How does hiring a contractor as an employee work?
It is common for employers to decide they want to hire long-standing contractors as employees. You’ll need to onboard them as you would a regular employee, meaning collect a W-4, complete new hire reporting, and so forth. You’ll also need to be sure to withhold taxes from their pay in addition to paying your share of taxes. Research labor laws as well, because hiring employees subjects you to much more oversight than working with contractors.
Should I withhold taxes for an independent contractor?
Generally, you aren’t required to withhold taxes from an independent contractor’s pay. They are obligated to pay their own contractor taxes. However, if you aren’t able to collect their Social Security number or are given an incorrect one, the IRS will require you retain backup withholding taxes of 24% from any payment you remit for the contractor’s services. If you receive a notice from the IRS telling you to collect backup withholding taxes, begin doing so immediately and remit accordingly.
Hiring independent contractors requires analyzing the work you need to be completed so that you can determine the best professional for the job. You’ll spend time researching different options and strive to choose the best one based on cost, ability, and ease of use. Understanding federal laws is also important so that you avoid penalties and taxes.
If you’re interested in using software that allows you to hire and pay contractors, consider Zenefits. The service allows you to pay contractors when needed and view their hire documentation—W-9 and contractor agreement—within the app. You can set the system to pay your contractors the amount they earn or retain backup withholding taxes if the IRS requires. Visit the website for a free demo today.