So Hired a Contractor... Now What?

As a small business owner, it is inevitable that you will find yourself hiring another person and/or a business to do some "contract" work for you.  The marketplace is full of individuals who act as freelancers or independent contractors, and using their services can really help you become more productive and profitable.

Using this classification of worker, however, also has some special nuances. Frankly it can be complicated, with the burden of executing correctly fully on you, the business owner. So, where do you start? Here are some avenues to start exploring

Learn the Difference Between Employee and Contractor! This is a big one and very important. It is also the most complex, so I am not going to try to dig into all the pieces here. I would refer you to the Common Law Rules from the IRS. These "rules" evaluate the Behavioral Controls, Financial Controls and the Type of Relationship you have with your contractor. How you answer certain questions will help you determine whether or not you just hired an employee or a contractor. Confused? Don't worry, you are not alone! The best rule of thumb is to reach out to your CPA for guidance. He/She will be able to give you an informed opinion and help make sure you have your contractors properly classified.

Get a W9  Assuming that you have indeed hired a contractor/freelancer, you now need to make sure you have the proper documents on file. One I find many small business owners forget is the tax document Form-W9 : Request for Taxpayer Identification Number and Certification. A W9 helps you classify who you are paying (are you paying an individual, a partnership, a corporation?) and will ensure that you have the proper Tax Identification number. You will use this information as you prepare 1099's at the end of the year. My recommendation is to require your contractor to complete this form before you release the 1st payment. Frequently clients say they don't intend to pay the contractor the minimum reporting amount ($600 or more), "do I still need a W9?" Simply put, yes! The best practice is to have one on file for all contractors who provide you services (design, bookkeeping, legal advice, etc) The only exception to this is if you are hiring a freelancer via a 3rd Party Source, such as Fiverr or  Upwork. Typically speaking, these type of services will handle the tax documents for you - but you must pay your contractor via the website! The other question I hear is, "if I get a W9 from someone, will that mean I have to send them a 1099?" No. As stated above, you are not required to send a 1099 unless you pay the person $600 or more in a calendar year. Also, there are certain types of entities that are exempt. Confirmation of exemption is done through acquisition of a W9 (see where I are going here... Get a W9)

Ask for Invoices When you first start out in business, you may find that you have a few "handshake" agreements. Someone verbally quotes you $750 for a business card design, they email you the design, you cut them a check. All done! Well almost. First, go back to "Get a W9." Then, make sure that you get some sort of written invoice. It doesn't need to be fancy. I've even taken an email, but you should get something. This becomes your receipt and shows that you paid this person for services.

Turn on 1099 Tracking in QuickBooks Both QuickBooks online and QuickBooks Desktop have the ability to track payments to Freelancers, Professionals and Contractors. It can even separate the Freelancers you pay direct from those you may have hired via a 3rd party supplier Use this feature to properly set up your contractors in QuickBooks and to make the production of your 1099s a simple push of the button.

Start to Recognize the Contractors/Professionals You are already paying: Frequently, when preparing 1099s, business owners forget about their Legal and Financial Professionals. Remember that anyone you pay for services can become 1099 eligible. This includes accountants, bookkeepers and lawyers.

Beware of the "cash only" Freelancer. Not every contractor who asks for cash is trying to thwart the system; and you may even know why they need cash. All the same, a cash payment does not supersede the necessity of a W9 or an invoice. Off their books, doesn't mean it is off yours!

Finally, and maybe most importantly, Seek Professional Advice! Having a contractor is an awesome way to accomplish things in your business. It is, however, best done well informed. When in doubt, call that CPA you have on speed dial and seek his/her advice! This list is not all inclusive. Hopefully, I have sparked some thoughts and have helped you be on your way to managing this key relationship!