Hiring Independent Contractors: The Ultimate Guide

Randa Kriss

Randa Kriss is a staff writer at Fundera, where she has written dozens of reviews on ecommerce, merchant services, payroll, and human resources solutions. She has a bachelor’s degree in English and Spanish from Iona College. Randa has previously written for the American Kennel Club, Planted, and Serendipity magazine.

Finding and hiring workers is no easy task—and yet—it’s one of the most crucial pieces of HR for your small business. Whether you’re solely responsible for your business’s hiring process, or you work with a human resources team, bringing on new workers requires numerous steps and considerations, including everything from paperwork to tax obligations.

With the complexity of this HR procedure, as well as the time, effort, and cost, you might find that, in particular situations, hiring independent contractors is better for your business. And while hiring independent contractors as opposed to part- or full-time employees may be the right decision for a variety of reasons, it nevertheless requires a specific process and important information you should keep in mind as a small business owner. 

Therefore, to help you sort through this involved task, we’ve created the ultimate guide to hiring independent contractors. We’ll explain what an independent contractor is, what you need to know about this type of worker, and finally, we’ll break down, step by step, the details regarding how to hire an independent contractor for your business.

What Is an Independent Contractor?

Before we explore the process of hiring independent contractors, let’s start with the basics. Perhaps the first important piece of information you need to know is exactly what an independent contractor is. There’s no set-in-stone definition, and there are several factors that may determine whether an individual is an independent contractor. Typically, though, an independent contractor is an individual who provides services to another person or business on an ad hoc basis. 

An independent contractor, then, is considered self-employed, and controls when, where, and how they provide the work they’re contracted to perform. Additionally, by name, an independent contractor is independent, meaning the individual has the freedom to work for different clients and is not beholden to one company or project. Some examples of professionals who very often are independent contractors include accountants, lawyers,  IT professionals, and real estate agents. 

As we’ll discuss in greater detail shortly, when comparing an independent contractor vs. an employee, this definition makes the two inherently different. 

Independent Contractors: What Small Business Owners Need to Know

Keeping these basics in mind, let’s explore the other essential aspects you should know before hiring independent contractors for your business.

Independent Contractors vs. Employees

By definition, independent contractors and employees are different—however, there are additional distinct characteristics between the two that are important to discuss. Knowing the differences between these two worker types is particularly significant because as an employer, you hold legal obligations in regards to your workers and taxes—and these responsibilities are unique to each worker type. 

To explain, as an independent contractor is self-employed, you are not responsible for providing the same benefits that you are for your employees. You also aren’t held to laws regarding minimum wage, overtime, unions, and other legislation that covers employee rights when working with independent contractors. Similarly, whereas you must withhold FICA taxes from your employees’ paychecks—as well as pay your share of employment taxes for them—this is not typically the case for independent contractors. 

This being said, before you go about hiring independent contractors, you’ll want to ensure that you fully understand the key differences between these types of workers so you do not hire someone as an independent contractor who should really be classified as an employee. 

In order to help business owners avoid this common issue, the IRS provides guidelines for distinguishing between the two. To this end, the IRS writes that when classifying workers you should remember two points: control and relationship. 

Unlike with independent contractors, with employees, you have specific control over what work is accomplished and how it’s done. You also designate the facilities or tools your employee has available, when they perform their work, and how exactly your employee is paid. 

Similarly, your relationship with your employees, on the whole, is different than it is with independent contractors. With employees, you provide benefits, your relationship is much more permanent, and generally, the work that your employees perform is part of the regular operations of your business. 

With these guidelines, you should be able to more easily determine if a worker qualifies as an employee or an independent contractor. However, if you’re ever in doubt, the IRS provides Form SS-8, which you can fill out and submit in order to have the IRS make this determination for you. 

hiring independent contractors for small business

Why Hire Independent Contractors? 

So, now that we know more specifically how these two worker types differ, you may be wondering why you should consider hiring independent contractors over employees. Although it may not be best to hire an independent contractor in every situation, there are certainly benefits to doing so (many of which we’ve actually touched on thus far) when it makes sense. 

Let’s explain. 

One of the reasons many businesses choose to hire independent contractors is to save money. As we mentioned, with independent contractors, you have less tax obligations and you do not need to provide benefits, office space, or equipment. Although hiring and working with independent contractors does require some paperwork (such as completing form 1099 vs. W-2), since you generally have less tax requirements, you’ll probably save time and money on administrative tasks, as well. 

Another reason you may decide to hire an independent contractor is for the flexibility. You can hire an independent contractor for a specific project or length of time and aren’t obligated to the same kind of relationship as you are with an employee. Using an independent contractor also allows you to end your relationship much more easily and with fewer legal concerns. 

Finally, as independent contractors are generally experts in their profession or field, you’ll hopefully find that they’re efficient, have verifiable credentials and work history, and maybe even have experience working with small businesses. Additionally, you may find that the type of work you need—such as marketing, consulting, or website building—is much more conducive to this kind of working relationship. 

However, despite these potential benefits, there are other reasons why you might choose to hire an employee instead of an independent contractor. 

With an employee, as per the qualifications we’ve discussed, you have control over the work they perform, as well as when, where, and how they do it. Moreover, if you want consistency and more long-term service from your worker, an employee is probably going to be a better fit than an independent contractor. Plus, although you may think that continuously hiring independent contractors will save you money, you’ll want to be careful that you don’t blur the lines between the two workers, as you don’t want to face a government or IRS audit that may find you in violation of tax or employment law. 

How to Hire an Independent Contractor: The Ultimate Step-by-Step Guide

Now that we’ve gone through all of this important background information, let’s break down exactly how to hire an independent contractor for your small business. Although hiring independent contractors may not be quite as time-consuming and involved as hiring employees, there are still essential steps you’ll want to follow. 

Step 1: Identify your business’s need and write a job description.

The first step you’ll want to take when hiring independent contractors is actually the same for hiring any type of worker—you’ll need to identify exactly what your business needs and write a job description that clearly spells out the kind of work and individual you’re looking for. 

If you’ve already determined that you want to hire an independent contractor, you more than likely have an idea of what kind of work you need this individual to perform for your business. Still, it’s a good idea to get into the details, thinking about the type of contractor you’re looking for, what experience you want them to have, as well as the work—is it a specific project or will you want this individual’s assistance on an ongoing basis?

Additionally, you’ll want to consider the pay you’re willing to offer, how you’ll communicate with this person, how they’ll work with any of your other team members, etc. As you go through this process, of course, you’ll want to continuously ensure that the job that you need falls under the purview of an independent contractor and doesn’t breach into what might be the responsibilities of an actual employee. 

After you know exactly what you need and what you’re looking for, you’ll want to write all of this information out in a job description. The job description, just as if you were writing one to hire an employee, should be clear, thorough, and explain the important details regarding the work, your business, and in this case, that you’re specifically looking to hire a contractor. 

hiring independent contractors for small business

Step 2: Circulate your job description and vet potential candidates. 

Like the first step, the second step of hiring independent contractors is very similar to the one you would take when finding employees. After you’ve crafted the job description for the independent contractor you’re looking for, you’ll want to circulate it, providing information on how candidates can reach out and submit themselves for the position. 

There are certain websites, like Upwork and FlexJobs, that are geared toward independent professionals, that you might consider using to search for the right person. You also can utilize sites like LinkedIn, as well as referrals, networking, or simply posting the description to your business website. 

In some cases, say if you’re looking for an accountant or lawyer for your business, you may look through directories or talk to other professionals, and find a specific individual you’d like to work with. If this is the situation, you can take the description you’ve written for the work you need, and reach out to the contractor directly to see if they’re interested.

Regardless of the way in which you receive candidates for your independent contractor role, you’ll want to take measures to ensure that you find the right person for your business. If you receive applications from an online posting, you’ll want to review any information they provide—their qualifications, resume, and any previous work, if possible.

You then may decide to talk to one or a few people specifically, whether on the phone, over videochat, or in person to talk more about the details of the work you need and to get a better sense if this person will work well for your business. 

And even if you reached out to a particular independent contractor about your work and their availability—and they’re interested—you’ll still want to verify their background and experience and talk to them at length to definitively determine if they’re a good fit. 

Although this process may not be as formal and straightforward as it may be when you’re looking for employees, it’s nevertheless important to take the appropriate measures to find the right independent contractor and avoid common hiring mistakes.

Step 3: Decide who you’d like to hire and draft an independent contractor agreement.

Once you’ve identified the independent contractor you’d like to hire, you’ll want to draft an independent contractor agreement. Whereas there are certain standards and understood aspects of an employer-employee relationship, you’ll want to outline these kinds of details in writing for an independent contractor. 

Your independent contractor agreement should include a description of the work the contractor will be performing, the length or scope of the work, how you’ll be paying them, as well as any other related requirements you have for this individual. Independent contractor agreements also usually include clauses regarding non-disclosure, confidentiality, intellectual property (if relevant), and termination. 

You may find it useful to consult an online legal service to generate your agreement (such as the one Rocket Lawyer offers) or even work directly with a small business lawyer. 

Step 4: Provide the independent contractor with the agreement to review and sign.

Once you’ve completed the independent contractor agreement, you’ll want to officially offer work to this individual and extend the agreement for them to sign. If the person comes back with edits or questions, you can work with them to reach a suitable agreement—or, if their terms are not what you’re looking for, you may search for another candidate. 

Hopefully, the independent contractor will accept the work and sign the contract. You will sign the contract, as well. 

hiring independent contractors for small business

Step 5: Have the independent contractor complete necessary new hire and tax paperwork. 

The hardest part is complete: You’ve officially hired an independent contractor to work with your business. Before the person begins their work for you, however, you’ll want to have them complete certain tax forms and new hire paperwork. Once again, the paperwork that you’ll need to obtain will be much less when hiring independent contractors compared to employees; however, you’ll still want to make sure that it’s completed correctly and in a timely manner.

Like the W-4 for employees, you’ll want to have your independent contractor complete IRS Form W-9. This form provides you with the basic information about your contractor, including their tax ID number, which you’ll need for tax purposes—namely, in order to complete their 1099-MISC form at the end of the year.

Additionally, you may have your independent contractor fill out new hire forms such as a direct deposit authorization (depending how you’ll be paying this person), emergency contact information, or other documents relevant to your specific business. 

After these forms are complete, you’re ready to start working with your independent contractor. You can repeat this process in the future when hiring independent contractors—adjusting it as necessary. 

What to Remember After Hiring Independent Contractors

Although these are the essential steps that explain how to hire an independent contractor, there are a few points you should keep in mind after the hiring process, as well. 

First, you’ll want to establish the process by which your independent contractor will invoice you and you will pay them. This is something that you should have at least covered briefly in your independent contractor agreement, but now that this individual is actually going to be completing work, you’ll want to make sure that all of these details are clear. 

You may decide to add your new worker to your payroll software and pay them using direct deposit. On the other hand, you may simply write and mail the person a check after they submit their invoice. Whatever the case, you’ll want to decide on the specifics and lay them out from the beginning of the independent contractor’s relationship with your business.

Next, as we briefly mentioned earlier, you’ll want to remember that like Form W-2 for employees, you are responsible for completing Form 1099-MISC at year end for every independent contractor who you paid more than $600 during the year. You’ll need to both submit this form to the IRS, give a copy to your independent contractor, and keep one for your own records. 

Along these lines, you should also be sure to keep records for all paperwork regarding hiring and working with independent contractors. These documents will be important when it comes to business planning, payroll, taxes, and of course, if your business is ever audited by the IRS or other government agency.  

Hiring Independent Contractors: The Bottom Line

At the end of the day, hiring independent contractors is not too complicated of a process—as long as you take the time to understand exactly what hiring and working with an independent contractor, as opposed to an employee, entails. Therefore, if you think that an independent contractor will be able to serve your business and perform work that you need, you should by all means go through the steps necessary to find and hire the right individual. 

Editorial Note: Fundera exists to help you make better business decisions. That’s why we make sure our editorial integrity isn’t influenced by our own business. The opinions, analyses, reviews, or recommendations in this article are those of our editorial team alone. They haven’t been reviewed, approved, or otherwise endorsed by any of the companies mentioned above. Learn more about our editorial process and how we make money here.

Randa Kriss

Randa Kriss is a staff writer at Fundera, where she has written dozens of reviews on ecommerce, merchant services, payroll, and human resources solutions. She has a bachelor’s degree in English and Spanish from Iona College. Randa has previously written for the American Kennel Club, Planted, and Serendipity magazine.

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