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Engaging independent contractors is attractive to businesses because of its many benefits, but it’s important to do it the right way to stay compliant. We’re covering what you need to know to stay out of trouble.

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Benefits of engaging independent contractors include:

  • Flexibility and ability to engage only when necessary
  • Outsourcing tasks not related to your essential business rather than setting up an entire department internally
  • Being able to end the engagement whenever you see fit
  • Not having to pay​ for benefits
  • Less onboarding hassle
  • Being able to pay by the job or by the hour

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Start With Worker Classification

First things first: ensure you are conducting independent contractor classification correctly from the outset. A worker’s status (whether they’re classified as an employee or an independent contractor) guides what benefits they’re entitled to by law. Legal disputes over worker classification have plagued everyone from Uber to FedEx. Following the rules and classifying correctly from the beginning saves time and the potential for legal troubles.

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Be Ready to Change With the Laws

From workers to legislators, people are thinking about how to manage the evolving landscape. Some envision an entirely new system with changing guidelines that suit changing times. Such a system might include “portable benefits” that travel with workers from company to company.

We can only guess how things will change, but we do expect them to change. It behooves company leaders to stay in tune with these kinds of conversations and legal considerations or to engage a third party that can stay in tune with them.

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Protect Yourself

  • Keep track of your payments to independent contractors and report them to the IRS
  • While it’s usually unnecessary to withhold income taxes from payments to independent contractors, if you receive a backup withholding notice from the IRS, you must withhold income taxes on payments
  • Create a contract for each independent contractor
  • Stay up to date on changes and/or updates to verify you stay compliant with all independent contractor laws

The Bottom Line

Engaging independent contractors offers benefits to workers and companies alike. While those benefits do include flexibility for workers and lower costs to employers, they don’t cover things we’ve grown used to, such as built-in 401K plans, health insurance options, and worker’s compensation. For many independent contractors, that’s a problem.

Currently, there is no roadmap telling you how to pay contractors fairly while keeping costs down. The good news is that we at PayReel have been on this road long enough to navigate it legally and ethically.

How PayReel Can Help

If you can’t (or just don’t want to) keep up with the rules and developments surrounding the on-demand economy, PayReel can keep up for you. Check out this handy guide to see if you might benefit from hiring a payroll services company.

Not only does our team manage worker classification, payroll, and payroll taxes, but as the employer of record, we even take on all risks associated with a variable workforce. We understand the importance of independent payroll compliance, and we are here to help. Going above and beyond in the ethics department isn’t just a warm and fuzzy notion. It’s a sound business decision, too.