When it comes to growing your LLC, it doesn’t always make sense to do it alone and carry the weight of the entire business on your shoulders. So, what options do you have?
An LLC has two options to choose from: hire LLC employees or hire independent contractors. Both will bring you skills and help to grow your business, but both are treated completely differently when it comes to taxes. If you don’t want the responsibility of needing to pay taxes (or even benefits) for an employee, hiring independent contractors is your best option.
What’s the Difference Between Employees and Independent Contractors?
When it comes to hiring independent contractors or employees, there are a few things you need to look at and consider.
If you are hiring someone for a full-time (permanent) position, the government will consider such a role as being an employee of the business. On the other hand, if you are looking to hire someone on a temporary basis or a project-by-project basis, they would be considered an independent contractor.
For tax purposes, hiring independent contractors (also referred to as freelancers) versus employees has its perks. When you are hiring independent contractors, the LLC is not responsible for paying taxes for that contractor (regardless of if they are an individual or company being used). The independent contractors themselves are responsible for claiming and paying their own income taxes, as well as FICA taxes (Social Security and Medicare).
Unsure if the person you are bringing on would be considered an employee or an independent contractor? The IRS has a great resource page to help with your determination and classification.
What Is the Process for Hiring Independent Contractors?
When you are considering bringing on an independent contractor to take some of the workload off of your shoulders, there are a few forms you need to use and become familiar with. All of these forms need to be completed prior to any work being done to ensure the person or people being hired as independent contractors are not classified as employees.
1. Form W-9
Provide the independent contractor with a W-9 to complete. This form will provide you with their Taxpayer Identification Number (TIN), their name and their address. A TIN can be either the Social Security number (SSN) of the individual or an Employer Identification Number (EIN) if they have a business. The W-9 is for you to file for your own personal records and needs to be kept for a minimum of four years.
2. Form 1099-MISC
If you plan on paying your independent contractor more than $600 for the year, you’ll need to complete a 1099-MISC (Miscellaneous Income) form for tax purposes. While the independent contractor is responsible for their own taxes, you will need to provide one copy of the form to the contractor and a second copy to the IRS (both need to be received no later than January 31 of a given year).
3. Form 1096
This form is for your business purposes and is considered an Annual Summary and Transmittal of U.S. Information Returns. You are to complete this form and it needs to be sent to the Social Security Administration by the end of February, along with copies of all of the 1099 forms from the independent contractors you used who were paid more than $600 for the year.
You also need to have some sort of contract or signed agreement in place that explains the responsibilities of the independent contractor, how they will be compensated (such as a flat fee per completed project or hourly), who is responsible for supplies or expenses, a confidentiality clause, an indemnity and hold harmless clause, a termination clause, etc. This is a MUST if you are hiring independent contractors, as it protects your LLC and lays out all expectations and guidelines for the job(s) they are being brought on to complete.
It should be noted that the government sees anyone working with you as an employee unless you can prove otherwise. They use three main factors to classify whether the person you hired is an independent contractor or an employee:
When hiring independent contractors, you need to treat them as such. They are not an employee and you do not control or manage them or their behavior. You cannot tell them when to show up for work, when to punch out for the day, or how many hours they need to work. They also cannot have any control over your business or your day-to-day activities or operations.
All independent contractors should be issuing you invoices once tasks and duties are completed and approved. It is a wise idea to always collect invoices so you have a paper trail you can fall back on should you get audited. Keep all invoices for your records due to the fact that the likelihood of being audited when you use independent contractors is increased.
The Pros of Hiring Independent Contractors
- Can save you and your business money
- Reduces your risk of lawsuits
- Adds a level of flexibility
- Allows you to outsource projects without tax liabilities
The Cons of Hiring Independent Contractors
- No control over the contractor
- If you don’t have work for them, they may go find work elsewhere instead
- Firing a contractor needs to be done carefully and according to the termination clause in the signed contract
- If they get hurt while working for you, your business can be liable for damages
- Some contractors retain all rights to their work completed
- The IRS can audit you to ensure contractors are being used as such, rather than being used as employees
If you found this information helpful, Incfile has a ton of great resources for you to use at your disposal. Our blog also contains valuable information that can answer many of the questions you may have surrounding your business and its growth.