Our clients often ask for a few general tips when engaging their independent contractors (ICs). With this in mind, here are five essential steps to getting this done correctly:
First, you should have a written agreement that defines a specific deliverable and defines the end of the project. The deliverables should be measureable, ideally with dates for completion and metrics to determine if the project was successful. The agreement should leave the means and methods to achieve those deliverables to the contractor.
Second, do not supervise the contractor. You probably engaged the contractor because s/he is an expert with abilities you did not have within your business, so leave the contractor alone to do the job the best way s/he sees fit. You should only be concerned with the final product you agreed to, at the price you agreed to, and within the time frame you agreed to. How the contractor gets there is his/her concern.
Third, you are safer if you engage a contractor who already has an established business. Ideally, the contractor should have a corporation and is an employee of that corporation. If so, you should contract with the contractor’s corporation to complete the project, not the individual. All payments should also be made to the corporation. Let the corporation pay and properly report any taxes due on wages and such. Also, you want your IC to have other clients that are not connected to your business. Your IC should be actively marketing to win new clients. You do not want the consultant to be financially dependent on you.
Next, when the job is completed, as agreed in the contract, you have to end the working relationship. Do not fall into the trap of using a contractor for a series of jobs that go on and on because it can lead to a misclassification. If you really want to keep this individual for a long term project, you should consider better ways to do it.
Finally, don’t fall for the “same work different title” trap. Many businesses act on bad advice and convert their former employees to ICs by simply changing titles to “independent contractor” and telling the workers they must pay their own expenses and taxes, when in reality nothing substantial has changed in the working relationship. Many civil suits, and even more tax audits, are spawned this way.
To navigate successfully through the worker classification jungle you need an expert to guide you. For hiring managers, the rule of thumb is to be proactive in protecting their companies when engaging contingent workers — both employees and ICs.
Disclaimer: Given the general nature and context of this article, the material presented should not be relied upon or construed as either tax or legal advice. For specific information on recent developments, the effects of particular factual situations or of a particular law in regards to your business, or before making decisions based upon this presentation, you should obtain the opinion of a qualified expert.