Hiring independent contractors has many benefits. Companies appreciate the ability to engage only when needed and end engagement whenever it makes sense, outsourcing tasks not related to your core business, have less onboarding hassle, and not having to pay for benefits. It makes sense why engaging independent contractors is often to a company’s advantage, but only when it’s done in accordance with IRS guidelines. Here’s what you need to know to stay out of trouble.
Let’s Start at the Very Beginning
The very best place to start whenever you’re engaging a worker is to classify correctly from the outset. Whether a worker is 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.
Be Ready to Adapt
From workers to legislators, people are thinking about how to manage the evolving employment 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. Businesses that stay in tune with these kinds of conversations and legal considerations are in position to adapt as those changes come. When that’s not something a company can accommodate, engaging a third party to handle those details makes sense.
There are some basic ways to protect yourself should the IRS ever come knocking. It’s always good business to create a contract with an independent contractor. This is beneficial for the business as well as for the worker as it makes sure everyone knows the expectations. From there, you must keep track of your payments to independent contractors and report them. Finally, while it’s usually unnecessary to withhold income taxes, you may receive a backup withholding notice from the IRS. In that case, you must withhold income taxes as indicated by the notice.
The Bottom Line
The world of 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. If you can’t (or just don’t want to) keep up with the rules and developments, PayReel can keep up for you. Check out this handy guide to see if you might benefit from having a third party handle these details for you. Our team manages worker classification, payroll, and payroll taxes. In addition, as the employer of record, we even take on all risks associated with a variable workforce.
Going above and beyond in the ethics department isn’t just a warm and fuzzy notion. It’s a sound business decision, too.