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
Before you hire an independent contractor, you need to have three important documents:
- A W-9 form with the person's contact information and taxpayer ID number,
- A resume to verify the person's qualifications, and
- A written contract showing the details of the agreement between you and the independent contractor.
- In addition, some businesses require an application form from independent contractors, but this application isn't the same as an employment application.
Hiring an Independent Contractor vs. Hiring an Employee
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. Independent contractors are considered to be self-employed, owning their own business.
Document #1 – W-9 Form
When you hire an outside worker, you must first get their tax information before you can begin paying them. Each independent contractor must complete a W-9 form, which is a request for taxpayer identification and certification. The purpose of the form is to
- Certify the person's taxpayer ID (EIN or Social Security Number),
- Certify that the person isn't subject to backup withholding (explained below), and
- Certify their exemption from certain types of reporting and payments.
Part I of the form is general information about the taxpayer, including:
- Taxpayer identification number,
- name and address, and
- Federal tax classification (business type).
- Exemptions from backup withholding and FATCA reporting.
Part II is the Taxpayer ID of the payee.
Part III is a certification statement.
Employer Responsibilities for Form W-9
Filing Form W-9. You don't have to send the form to the IRS. Keep it in your files for that payee, so you can show it to an auditor if necessary.
Backup Withholding. You may receive a notice from the IRS that the payee's taxpayer ID doesn't match the IRS records. In this case, you must begin backup withholding for this person. Beginning on the date when the order designates, withhold 24% of the payment amount from each payment. You must also make payments to the IRS of the amounts you withheld and file a report (Form 945). If you don't collect backup reporting as required, you may be liable for the uncollected amount.
To check Tax ID numbers of payees, you can use the IRS e-Services site. The person registering for your business must be a principal or responsible official.
Exemptions from Withholding. If a payee says they are exempt from backup withholding, you may rely on this claim unless you have actual knowledge that the exempt payee code or classification is not valid.
FATCA Reporting. The Foreign Account Tax Compliance Act (FATCA) law requires that foreign financial institutions and other foreign entities report on the foreign assets held by their U.S. account holders, or be subject to withholding on some payments. A U.S. financial institution with an account in the U.S. doesn't need to get an exemption code for this reporting.
If you receive a W-9 form with a FATCA exemption code and you know the person is a specified U.S. person, you can't rely on the form to treat the person as exempt from FATCA reporting.
Reporting W-9 income. 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, beginning in 2020 and going forward, you have the information to create a 1099-NEC form for that person for the tax year.
Document #2 – Resume and References
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. In most cases, you will want a resume, not a job application. Ask for references from previous customers or clients and work-related individuals who know this person.
You may want to do a background check on this person, depending on the type of work being done. For example, someone who has access to your financial records should be checked. You can also check with the professional association for that type of work in your state (like the state bar association or state CPA board).
Document #3 – A Written Contract
For every independent contractor who works for your company, you should a signed 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
- Ownership of the work — the contractor or the hiring company.
The most important clause in this contract should be a statement that this person is an independent contractor, not an employee. It's essential that both you and the independent contractor understand the type of relationship and the fact that they are responsible for paying their own income taxes and Social Security/Medicare taxes.
You May Also Want Additional Agreements
Depending on the type of work being done and the specific needs of your business, you may want to get other agreements, depending on the type of work the person will be doing. These sub-agreements (sometimes clauses in a contract) are called restrictive covenants because they restrict what the independent contractor can do.
A confidentiality agreement (sometimes called a non-disclosure agreement) requires the contractor to keep your business trade secrets confidential and not share them with others unless it's agreed to.
A 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 is usually written to restrict someone's actions for specific activities, for a specific time period, and within a particular area. Some states (California, for example) won't enforce non-compete agreements, so check with your state before you try to put one of these clauses in a contract.
A non-solicitation agreement keeps employees from working for the competition, and it can also be used to keep an independent contractor from stealing your employees or customers.
For all of these agreements, the key is whether you can take the person to court if they violate the terms of the agreement. The more restrictive the agreement, the more likely a court will look at it as restraint of trade and throw out the agreement. Being reasonable in terms of time and distance can make it more likely the court will hear your case.
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.