How to Hire Contractors the Right Way
As your business grows I want you to consider how much of your time/money you can get back if you were to outsource the tasks or responsibilities that are slowing you down or not keeping you in your sphere of genius? My first outsourced hire was for graphic design. Could I learn to do it, sure. Would my results be as quick or professional as hiring someone that does it for a living? Absolutely not, and in the meantime, I’d be wasting precious billable hours of my time creating graphics and working on my branding.
When you’re first getting started building your business, it can be tough to justify spending more money or hiring someone to create something for your business, but the example below is an actual scenario I had in my business when thinking about doing a project myself or hiring a professional:
Option 1: DIY
8 hours of my time and a subpar result, with no income earned on my end
Option 2: Outsourced
15 minutes of my time to explain the project, $400 fee
6 hours of client work of my own, generating $600 in earnings
Not only do I net $175 in this scenario, but I reclaim almost 2 hours of my time.
Next, you have to be really diligent to make sure the contractor you’re looking to hire isn’t just a misclassified employee. Why does this matter? TAXES. The decision to employ someone as a contractor or an employee impacts who pays taxes to the state and federal government, how and when the work can be performed, and many other facets of the work arrangement. Most small businesses will prefer to hire a contractor because they save money on benefits, unemployment contributions, and paying Medicare and Social Security taxes.
The IRS says, “The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work, not what will be done and how it will be done.” Keep this in mind any time you look to hire, and remember that if you want to reap the financial benefits of a contractor relationship you need to be able to relinquish control over their processes, and be able to mutually agree upon the end result needed.
Why is this important?
We’ll use my graphic design project again as an example of what hiring her as an employee vs a contractor looks like.
I let her know the project and what I need designed
I tell her my ideal timeline
She prices out the project and sets the payment terms, I don’t set her pay
She lets me know that her availability allows her to take the project and complete it in my time-frame
I don’t tell her what programs to use, what hours to work, or what days to be available for communication
I provide her with my Adobe software subscription, and the timeline I need this project completed in
I chat with her daily about the project and train her on how to do the project in the same way that I have done similar projects in the past
She works exclusively for me in a full-time capacity and this is just another project I’ve sent her way
I pay her an hourly wage or salary that she was hired at by me
She works during work hours I set and is available for questions during timeframes I specify.
The differences above illustrates just one scenario of many potential work arrangements where you will need to be cognizant of your needs to make the best choice for whether to hire a contractor or an employee. If you make the decision to hire someone as a contractor to avoid paying employer taxes, you can be subject to fines and have to pay back employer taxes for anyone that was determined to be classified as a contractor in error.
You can find good guidance on the difference from IRS here
One of the biggest legal concerns to take into consideration (especially when outsourcing client work), is whether you have a retainer or client contract that prohibits using subcontractors. If you do, or if you’re in a line of work that deals with sensitive information (like me), the amount of information I’m comfortable sharing is very small. I ask my clients to trust me and their personal information that I have access to, and I guard it fiercely. Even now, with a team I’ve worked with for over 2 years, there are lots of client details I don’t share to protect their privacy. All of that being said, when you look to hire outside help, you need to understand there’s an element of letting go of control and trusting.
If you’ve decided you’re ready to jump into your first contractor agreement, and you both reside in the US or are US citizens, you’ll want to have the contractor fill out and return a copy of this W-9 document. The W-9 provides you with all of the information you’ll need to issue a 1099 to your contractors at the end of the tax year. A 1099 is the contractor version of a W-2 that you would have gotten if you’ve ever been an employee in the US. The 1099 reports the income you paid to a contractor that performed services for you in the US to the IRS. It’s then the responsibility of the contractor to claim the same earnings on their tax return. If you hire a contractor from outside of the US you’ll need to have them fill out and return this form instead. You won’t need to issue anything at year end, but you will want to keep a copy of them on hand in the case that you’re audited, so you can show proof that the services you paid for weren’t performed in the US.
Feeling like there’s a whole lot more to unpack here? You’d be correct! I dive deeper into this topic and everything else you need to know to run your own business in my course, Finance University for the Self-Employed (FUSE). Be the first to hear when it opens for enrollment by signing up here.
Make sure you read all about how to Build a Team of Contractors in my previous blog post here.