Hiring Independent Contractors for Your Startup

By Fernando Berrocal

Nowadays, there are a variety of methods to recruit specialists for your startup.  Independent contractors make up a specific class that is more common than ever in different businesses across the globe. In general, a person is considered to be an independent contractor if they are managing or guiding the final product or service–rather owning the whole process (having a broad scope of responsibility).

Startup Employee and Contractor

Small businesses often discover that hiring contractors is a great option for completing tasks without having to hire more staff.  Permanent hires require extensive training–not to mention all the required paperwork. However - as with any mode of employment - businesses must familiarize with the ins and outs of using independent contractors. Even though they are not permanent employees, there are tax requirements to keep in mind when it comes to contractors.  These taxes must be deducted and fully paid. Remember: in addition to the income and social security taxes, you must also cover medicare (and other payroll taxes).  Typically, employers must deduct unemployment taxes from employee earnings. There are no taxes to be withheld or paid on payments made to independent contractors.

So, what does hiring an independent contractor entail for a small business?  You are regarded as an independent contractor if you work as a contractor, run a firm, or perform services for other businesses.  An actual business employee, on the other hand, enters into an agreement with an employer to exclusively do services (work) for their business.  It’s important to determine which category a team member fits into.

A more specific way to determine this is considering the nature of the business connection with that individual. Take into account any data that may be used to identify whether the individual delivering services is a worker. After that, you can decide how you will handle payments for the services. These individuals can be independent contractors, common-law employees, statutory employees, and/or government employees.

Venture Capital

When determining which category a person fits into, startup founders (and recruiters) must take advantage of all relevant considerations. Think about the the overall employment relationship–what do you, as an employer, want from the candidate?  Consider the autonomy and agency of the potential employee, as well.  As you approach a decision, review the various points you contemplated in the process.  The following questions can help you determine whether a team member is (or should be) a contractor: 

  • What is the legal nature of the relationship? Are formal independent contractor contracts, or employee benefits such as a pension plan, insurance, vacations, etc. in place?
  • How much of an influence does the business have on the actions and attitude of the employee?
  • Are the business components of the employee's job under the employer’s control? These include wages, cost-reimbursement payments, and the source of equipment and supplies.

If, after reviewing these questions, you are still unclear whether a person is an independent contractor or an employee, IRS Form SS-8 can be helpful.  You can also look into resources regarding the determination of worker status for federal employment taxes, and income tax withholding; these resources will likely emanate from the Internal Revenue Service (IRS).  Both employers or employees can file this form. To assess the worker's status, the IRS will examine the facts–a decision can take up to six months. Note: if your company uses the same employees to carry out specific services, you might need to file the Form SS-8 PDF.

Hiring an Independent Contractor

Certain industries require specific guidelines and procedures regarding employment tax.  For instance, certain vehicle operators are categorized within the moving industry; others are technically in the transportation industry (in the moving industry) are categorized according to the rules. Once industry has been established, there are additional filing considerations for employment taxes.  After all documents are successfully filed, you will pay the applicable tax that you (or the IRS) has determined.  Note: there are different forms - and taxes - for independent contractors and traditional employees.

Classifying a worker as an independent contractor has different kinds of repercussions. Therefore, if you mistakenly have done that, you risk being responsible for their employment taxes. The remedy clauses listed below won't be applicable. There are, however, additional relief provisions. You must submit any federal information returns that are consistent with how you handled the employee to be eligible for this relief. 

The Voluntary Classification Settlement Program (VCSP) aims to convert independent contractors into employees. With the help of this optional program, taxpayers can reclassify workers as employees for the next employment tax periods. It offers taxpayers who agree that their workers (or any other class of workers) will be classified as employees some exemption from federal employment taxes. The taxpayer must satisfy specific qualifying requirements to be eligible for this program. Form 8952, Application for VCSP, must be submitted to be qualified for a closure arrangement with the IRS.

There are many considerations to make if you want your small firm to engage an independent contractor. In this article, we have looked at the benefits and drawbacks of hiring independent contractors and if doing so is right for your business. If you still need clarification or want more detailed information, consult a lawyer or accountant. They can assist you in weighing the advantages and disadvantages of making this choice.

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