What to Know When Hiring an Independent Contractor
If you’re a small business owner, you might consider hiring an independent contractor instead of a full-time employee. There are certainly many advantages to doing this, such as saving income on Medicare and social security. However, the IRS is very careful about ensuring that the business as well as the employee are complying with all the relevant tax regulations. Here are a few useful points to keep in mind before and after hiring an independent contractor.
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Write it down
When you hire an independent contractor, be sure to have some kind of written contract or document that explicitly states your work relationship, payments and other relevant details such as duration and nature of work. This is important because many businesses hire contractors instead of employees to save on taxes and it is important for you to have a document that justifies and explains the contract – if ever the tax man comes knocking!
Talking of taxes, don’t forget to state in the contract that the person being hired is responsible for all tax payments so you’re not held liable for any non-payments by the independent contractor. However, as the employee, you should make sure you give the contractor form 1099 (if he or she was paid more than $600 per annum) before January 31 of the following year.
If you’re tempted to classify an employee as an independent contractor to enjoy all sorts of benefits and tax savings, well think again. The IRS is really on its toes when it comes to assessing contractors’ taxes. If the IRS discovers that you’re trying to pass off a full-time employee who does not meet the requirements and definition of a contractor, you could have to pay more than double of what you think you would have saved! You’ll pay a portion of employee taxes that should have been withheld, you will also have to pay FICA and unemployment taxes. There may be more penalties and interest depending on what the IRS discovers.
Several criteria need to be met to classify the person you hire as an independent contractor. Here are some of them: The individual should be able to set his or her own hours; he will not require special training from your organization to perform his function (he or she offers some kind of external support or expertise); the contractor will have an independent business and his or her services to your organization are part of the business.
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