We’ve all heard of independent contractors, but do you really understand how they’re different from employees at an organization? To start, anyone who has hired on a temporary or project-basis can be an independent contractor.
So, if a small business owner hires an electrician to fix the lights in their retail store, they’d be hiring an independent contractor. On top of this, many self-employed business owners are also independent contractors if they don’t have any other employees.
Some examples of independent contractors can include:
As a small business owner, it’s critical to understand if someone working for your company is an independent contractor. This determines if you need to collect payroll taxes for them or not.
What Is an Independent Contractor?
An independent contractor works for your business but isn’t an employee. This means you won’t have to deduct taxes from their wages. You also won’t need to withhold their Social Security and Medicare taxes. Instead, they’ll need to file their own self-employment taxes.2
It’s also important to note that independent contractors are becoming more common as people continue to pursue new side hustles.
What Is a 1099 Contractor?
A 1099 contractor is the same thing as an independent contractor. The number “1099″ refers to the tax forms that contractors fill out detailing their earnings from the year. The terms “independent contractor” and “1099 contractor” are often used interchangeably.
Examples of an Independent Contractor
Some self-employed professionals that can be independent contractors include:
- Building contractors
- Website experts
Small business consultants are also generally independent contractors.3
What Is the Difference Between a 1099 Contractor and an Employee?
1099 contractors are a part of the contingent workforce, which also includes:
- Outsourced or non-permanent workers
Members of this group work on a per-project basis, unlike a small business’s existing employees. Some other differences to be aware of include:
- Employers have a degree of control over the quality of an independent contractor’s work but not the method through which they get the work done. In contrast, employees must follow employers’ directions on how to complete work.
- An independent contractor is responsible for their own equipment, materials and tools — including their working space. An employee receive these from their employer.
- A worker is an employee if they receive benefits like 401(k) contributions. Independent contractors don’t receive these from the projects they perform at other companies.
Is It Better to Hire an Employee or a 1099 Contractor?
Not sure if you should hire another employee or an independent contractor instead? Hiring independent contractors on a per-project basis can be cheaper than taking on another employee. This is because while you may pay the contractor more per hour, you won’t have to pay other expenses like:
- Office space
- Workers’ compensation
- Social Security and Medicare taxes
Still not sure when to hire an independent contractor? Some advantages of hiring one include:
- Expertise — Independent contractors tend to be very specialized and can provide skills you may not have in-house.
- Flexibility — You can pay by project and avoid paying your employees when there is no work to do. It’s also simple to end this type of relationship compared to firing an employee.
- Outsourced tasks — This can help you avoid having to set-up a new department or manage additional employees. For example, many businesses outsource Information Technology (IT) work.
- Less legal risk — Any 1099 contractors are not eligible for workers’ compensation or wrongful termination claims.
- Can be less expensive — You won’t need to provide benefits or pay FICA taxes like Social Security and Medicare on contractor income. This also means less paperwork for you.
How Do I Pay Someone as An Independent Contractor?
To pay an independent contractor, follow these steps:
- Decide if you’re paying them by the hour or a flat rate by the job. From there, independent contractors will establish their rate.
- Sign a contract that outlines deadlines for your job, payment milestones and any other important details.
- Pay the contractor once they complete the job and supply them with a W-9.
- Keep track of all payments.
Do You Qualify as An Independent Contractor?
Are you a self-employed business owner but not sure if you have independent contractor status? If you’re paid to perform work for another business that you’re not employed by, then you’ll likely be an independent contractor. Generally, many independent contractors operate as sole proprietorships or single-member LLCs.
Remember, self-employed business owners and independent contractors will generally need to file an annual tax return and pay quarterly estimated taxes. This estimated tax pays your Social Security, Medicare taxes and income tax because you don’t have another employer withholding it for you.
What Should a 1099 Independent Contractor Keep Track Of?
Independent contractors are responsible for their own income taxes and self-employment taxes. Whether you’re a business owner or a freelancer, it’s important to keep track of income and spending so that you can file accurate information on your tax forms. Eligible business expenses can also be tax write-offs, so it’s also important to keep track of those. For example, mileage tracking can be important if you qualify for mileage deductions.
Time tracking is also important for independent contractors. You’ll want to make sure you’re billing your clients accurately.
Must-Have Independent Contractor Apps
It’s important for independent contractors to keep track of their income and spending. One of the best ways to do this is by using programs like:
- QuickBooks Self-Employed — This program helps independent contractors with double-entry accounting, invoicing and more.
- Xero — With this software, contractors can easily track bank transactions as they flow in day-to-day so they can see cash flow easily. This program also offers financial reporting and invoicing to keep transactions organized.
- Freshbooks — This program is known for being easy to use, allowing contractors to invoice their clients and get paid faster.
- Bench — One of the biggest perks of using Bench is that a team of bookkeepers helps monitor your financial accounts and makes sure everything is up to date.
- GoDaddy Bookkeeping — This software can send recurring invoices to clients you work with on an ongoing basis. This can save you time when billing them.
These programs are also available as mobile apps.
So whether you’re self-employed or a business that’s looking to hire workers for projects, it’s important to understand who counts as an independent contractor. From there, you can determine if hiring them or establishing yourself as one is right for you and your business’ goals.
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