What You Need to Know About Hiring Your First Contractor

A big step for a business is deciding to hire workers.  A business owner is often faced with a chicken or egg dilemma- does she hire employees anticipating growth of the business, or wait until the business grows and then rush to find workers?  When a business is just starting out, it may not have enough work to employ someone full time.  Owners may consider hiring independent contractors to complete smaller, concrete tasks for the owner or to work on certain projects. 

Benefits to hiring workers as independent contractors instead of employees allow business owners to outsource certain tasks, such as managed IT services or bookkeeping without the typical hassle of setting up W-2 withholdings, benefits, etc.  Employers benefit from the ability to end a relationship with a contractor more easily (and with less emotion) than with an employee.  Other benefits are financial- not having to pay the contractor when there is no work not paying Social Security and Medicare taxes on behalf of the contractor.

Before hiring your first Independent Contractor, you should do three important things and make sure you have certain key documents in place.  While this list is not exhaustive, it will provide you some background before hiring that contractor.

1. Understand what makes an Independent Contractor.  Independent contractors are often business owners in a profession or trade that offer services to the public. According to the IRS, someone is an independent contractor for the business if the business owner can only control or dictate the type of work or result of the work to be completed and not the manner in which the work is completed.  There are a few questions that can help you determine if the person you want to hire will be an independent contractor and not an employee.  First, will you be hiring this person for a temporary project or projects?  Second, will the worker determine where and when they will conduct the work that will be done for you?  Third, will this person use their own technology or equipment to complete the work performed?  Finally, will the worker be paid on a flat fee basis for the project or hourly?  Generally, the more independent the worker is in controlling the manner of their work rather than being controlled by the employer, the more likely the worker would be considered an independent contractor.  The more the employer defines the time, place and manner the work is done, the more likely the worker is an employee. It is very important to make sure you classify your workers correctly as independent contractors or employees, or you risk paying fines and penalties if you misclassify.

• Perform a Background Check. As with any new hire, make sure to request and review the prospective worker’s resume and references before commencing an employment arrangement.  Review their resume, ask questions and make sure the person has the qualifications and experience necessary to complete the projects your business needs done.  In addition, call the references.  If the worker owns their own business, check the Better Business Bureau as well as online reviews. Make sure there are no complaints filed against this worker or that there is a criminal background that would prevent the worker from effectively working for your business or presenting a danger to your staff or customers.

• Prepare an Accurate Payment System.  Business owners should ask that the independent contractor submit detailed invoices for work performed.  The contractor should not get paid prior to receipt and review of the invoice.  Paying the contractor without receipt of a payment looks more like paying an employee, not a contractor.  In addition, no taxes will be withheld from the payment to the contractor, the contractor is responsible for his own income taxes, Social Security and Medicare.  You will need to keep track of payments made to the contractor and report these to the IRS.

In addition to taking the steps outlined above, ensure that you have the following important documents in place for your worker:

1. Tax forms. The independent contractor will complete a W-9 form with their tax-id number and you will complete the corresponding 1099-NEC to report payments made to them to the IRS. It is a good idea to check with your CPA to ensure that you have complied with the state and federal requirements.
2. Contract. While every employee should sign an employment agreement with you, every independent contractor should sign a contract that defines the work to be performed, the nature of the relationship (independent contractor, not employee), termination provisions, and payment terms.
3. Confidentiality Agreement.  As a business owner, your success stems from your unique way of performing your business and your trade secrets.  When an independent contractor begins working with you, he will become familiar with these secrets and you will want to make sure he doesn’t disclose them to your competitors or anyone else without your permission. 
4. Agreement not to Compete or Solicit. You may also want the contractor to sign an agreement not to compete with you after your relationship ends.  A non-competition agreement sets out terms to restrict the contractor from leaving your business and competing with you in a certain geographic area and for a specified time.  An agreement not to solicit is written to prevent the contractor form taking your customers or employees with them when they leave.

Keep all records and agreements described above on file for each of your independent contractors.  While you may not be required to turn over these files, if you are audited by the IRS, having these documents will help you confirm the relationship of the independent contractor to your business. While this list may not be exhaustive for every type of business, we have a team of lawyers ready to help you prepare the documents listed and any others that are specific to your business.