With the rise of remote work in recent years, hiring independent contractors has become an even more accessible and attractive option for businesses of all sizes. As companies look to expand, companies may require more assistance but not have enough resources to hire new full-time employees. This is where independent contractors, or self-employed individuals who perform work or services for multiple clients, come in.
Independent contractors help businesses fill in the gaps, completing work that current employees cannot fulfill. This work may include:
- Specific projects
- Content creation
- Specialized services
- Other roles needed to grow a company
Independent contractors do not receive employee benefits, tax deductions, and more.
Hiring independent contractors have benefits and downsides that businesses should weigh to decide whether hiring contractors is right. Keep reading for more information on how to hire independent contractors, the pros and cons of contractors, avoiding misclassification, and paying and taxing workers.
How to hire independent contractors
When hiring independent contractors, it’s essential to plan. Before setting out on this endeavor, ensure your business has everything required to hire and pay independent contractors legally. These preparations include:
- Determining the duties needed
- Formulating contract templates
- Establishing payroll systems
- Gathering necessary tax forms
- Understanding international labor laws, if relevant
- Consulting with an independent-contractor expert
With these preparations arranged, you can begin to source candidates.
Ensuring compliance with independent contractors
After choosing a candidate to hire, it is essential to ensure the organization is fully in compliance with the country’s employment laws and tax regulations. These steps include:
- Carrying out background and credential checks.
- Craft and send the locally crafted compliant employment contracts.
- Application and acceptance of W4 tax forms
The worker contract is an essential document to protect you from legal liability, and it should include:
- Details about the role, payment, and confidentiality requirements
- Statements on the ownership of work created by the independent contractor to ensure intellectual property (IP) protection
- Language on the contractor-status of the worker, clarifying that they are not an employee
Many businesses choose to work with an employer of record (EOR) like Skuad to avoid the legal risks and complicated management of independent contractors. Skuad allows companies to quickly hire and pay independent contractors while ensuring legal compliance and IP protection, taking these risks off your hands.
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How to correctly classify independent contractors
When hiring independent contractors, it’s essential to classify them correctly. In the United States and most nations worldwide, the law classifies independent contractors and full-time employees differently. Employees often receive statutory benefits and have taxes filed on their behalf. At the same time, independent contractors are not entitled to benefit packages and are solely responsible for filing their taxes and other statutory deductions.
Misclassifying independent contractors as employees occurs regularly and is a costly mistake when hiring both locally and globally. It results in fines, penalties, legal issues, and back payments of wages and benefits. Individuals negatively affected by misclassification may also file lawsuits against the employers responsible.
Employers must understand the difference between contractors and employees and the factors that define employment classifications.
In general, independent contractors are workers who:
- Work independently on a contractual basis
- Pay their taxes and social security contributions
- Work for multiple organizations or clients
- Are not regarded as a full-time employee of any organization
Misclassification of independent contractors occurs when an organization does the following:
- Giving employee benefits to contractors
- Dictating the when, where, and how the contractor carries out his work obligations.
- Providing work equipment
- Providing paid leave, training, and other benefits
- Communicating employment status as being an employee, both written or verbally
The following documents are essential to avoid the misclassification of independent contractors:
- W-9 tax form
- Contractor’s resumes with their contractual experience
- A signed contract and confidentiality agreement
Partnering with an employer of record like Skuad helps you avoid misclassification risks when hiring independent contractors. We have the international employment expertise to help you hire, pay, and correctly classify independent contractors in over 160 countries.
Benefits of hiring independent contractors
- Reduced costs: Contractors come at a lower price than employees, with no paid leave, salaries, healthcare, equipment, employee tax registration, and other expenses required.
- Less paperwork: Working with contractors requires less paperwork than employees, as only a couple of tax forms, a contract, and a payment log are needed.
- No benefit contributions: Employers do not have to pay contractors social security or healthcare contributions.
- Flexibility: Independent contractors allow for more flexibility for both parties, making them accessible and convenient to work with.
- Outsourcing non-essential tasks: Contractors can complete non-essential tasks to free up time for employees, increasing overall productivity.
- Quick help for short-term projects: Businesses don’t have to go through the long, costly employment process to find services for projects with upcoming deadlines.
Drawbacks of hiring independent contractors
- Legal risks: Hiring contractors risks misclassification, which can be costly and lead to litigation, investigations, and fees.
- IP loss: Without formal agreements, contractors may own part or all of the intellectual property of the work they complete for your company.
- Less commitment: Working for multiple companies at once, contractors may be less committed to your company, which can result in low retention, less reliability, and reduced quality of work. Contractors may also end their contracts at any time with no notice required.
- Less control: Employers have no control over contractors as they cannot dictate when, where, or how work is completed, which may be difficult for specific roles or projects.
The staffing decision: employees or independent contractors?
With the pros and cons of independent contractors in mind, your company must decide what’s best for your needs, work culture, and business model.
Overall, organizations should hire full-time employees:
- If the Job description is a crucial component of the business
- If the job role is long-term
- The position requires close supervision and time management
- Your company is looking to invest in long-term, committed employees
Organizations may hire independent contractors if:
- The independent contractor’s services are not crucial to the organization's daily operations.
- If it is a short-term or a one-time project
- The position does not require close supervision
- You do not have the resources to hire a new employee
Different businesses have different needs, so make sure to assess yours thoroughly before coming to a decision. Additionally, ensure you have the legal understanding and procedures to correctly hire, pay, and classify each type of worker.
Payroll and taxes when hiring international contractors
There are multiple options to pay independent contractors, such as PayPal, checks, wire transfers, and payroll outsourcing. However, paying international contractors can be more complicated as foreign countries have separate currencies, banks, and payroll requirements.
However, one of the best means of making payments to contractors is by partnering with an Employer of Record platform like Skuad.
Skuad provides companies with a comprehensive global payroll dashboard, enabling organizations to pay contractors in their preferred currencies with the click of a button. Additionally, Skuad ensures organizations pay their independent contractors in compliance with local employment laws, eliminating misclassification and other risks of breaking payroll and employment laws.
Independent contractors manage their payroll and file their taxes independently. However, if required in their countries of residency, employers must keep and pay their tax records for all contractor payments. Employers in the United States must keep track of all payments to contractors and report them to the IRS each year using Form 1099-NEC. This requirement still applies when employers hire international contractors.
Easily hire independent contractors with Skuad
Many companies work with an Employer of Record (EOR) platform like Skuad to simplify independent contractors' hiring, payroll management, onboarding, and compliance requirements to avoid legal risk.
An Employer of Record provides global HR and payroll services to help companies easily hire and pay local and international contractors and employees. An EOR like Skuad has a global network reach in over 160 countries, ensuring organizations remain compliant when hiring foreign contractors. Skuad also enables payment and onboarding of independent contractors, including crafting legally compliant contracts.
For organizations planning to hire independent contractors, Skuad’s global employment and payroll platform offer the following services:
- Management of all international HR services
- Efficient Global payroll management
- Employing highly skilled independent contractors
- IP and data protection
- Ensuring compliance with country-specific employment laws and regulations.
Skuad handles the entire employment lifecycle on behalf of organizations by facilitating the seamless hiring of independent contractors. By acting as the legal employer, Skuad enables the organization to scale business operations in compliance with employment laws and with an efficient HR administration. To know more about Skuad, book a demo today.