3 Documents You Need When Hiring a Contract Worker
Hiring Freelancers, Outside Contract Companies, Non-Employees
Hiring an independent contractor to work in your business? The hiring paperwork for independent contractors is much simpler than for employees, with only a few documents needed, but these are important documents. Getting them at the beginning of the working relationship is a lot easier than when the job or contract is done, and you can't find the person.
Hiring an Independent Contractor
Hiring an independent contractor is different from hiring an employee. There is less paperwork involved because you don't have to set up payroll taxes (income taxes and FICA taxes).
You must verify the person's tax ID and make sure the person is qualified for the job, is dependable, and of good reputation.
You may also want to make sure the contractor doesn't disclose important company information or leave your company and take customers or employees.
What Is an Independent Contractor?
An independent contractor may be one or more people who are in a separate business from yours. This includes freelancers (like artists, planners, or web designers, an outside company (doing cleaning work, for example), a professional such as an attorney or tax preparer — anyone you are paying for services and who is not an employee.
The most important thing to keep in mind when hiring outside workers is that you must document your payments to them. If you pay anyone (with only a few exceptions) $600 or more in a year, you must provide this person or company with a Form W-9, which includes the contractor's taxpayer identification number, name, and address. You must have a W-9 on file for each independent contractor so that you don't have to withhold income taxes from that individual. Then, you have the information to create a 1099-MISC form for that person for the tax year (similar to a W-2 form for employees).
There may be an income tax withholding form required by your state. Check with your state's income tax authority for more information.
Document #2 - Application, Resume, or Documentation of Qualifications
Before you hire anyone, you should request and keep a copy of the documents showing the qualifications of this person for the work being done.
If you ask the person to complete an application form, it should be with the understanding that the application is not for employment as an employee. It's better to get a detailed resume from the person, including education and previous work history.
Ask for references from previous employers and work-related individuals who know this person (the person's pastor or brother-in-law is not a good reference).
You may want to do a background check on this person. As long as you require all contractors to have a background check.
If the person is doing confidential, financial, or other critical work, you should also do a background check and get references. If the person or company is bonded (insured), you may want to get a copy of that insurance.
Document #3 - A Written Contract
For every independent contractor who works for your company, you should have a copy of a contract on file, signed by both parties. It may sound like overkill to require you to have a contract for each independent contractor relationship, but some agreements need to be put in writing. The contract protects both of you in the event of a dispute.
Some issues that need to be addressed in this contract and some terms that need to be included:
- The scope of work, including when the job is to be done, and deadlines.
- Amounts and timing of payments, when payments are due, what happens if payments are not made.
- Who owns the work — the contractor or the hiring company?
The most important part of this contract should be a statement that this person is an independent contractor, not an employee.
You May Also Want Additional Agreements
Depending on the type of work being done and the sensitivity of your company information, you may want to get two other agreements: A confidentiality (non-disclosure) agreement and a non-compete agreement. While these documents aren't required by any government agency, they might be a good thing to consider based on your type of business and the type of independent contractor you hire.
The confidentiality agreement requires the contract worker to keep confidential any information about your company that could be harmful to you if it was disclosed.
The non-compete agreement sets out the restrictions on the contract worker from leaving your company and taking your customers or clients to another company.
It often happens that an independent contractor will work for an employer for a while to gain skills and experience and then quit, go down the street, and take some of the employer's customers along. To prevent this from happening, many employers of independent contractors require a non-compete agreement.
A non-compete restricts the ability of a former employee or contractor from owning a competing business within a certain area for a certain time after leaving the employer and from doing work that competes directly with the former owner.
Keeping Records on Contract Workers
You as a business owner are not required to turn over these documents to anyone, but if you are ever audited by the IRS, or you need to verify the relationship, you will need to produce them. Create a file for each independent contractor you hire, with these documents.