The growing “contingent workforce” is ready at a moment’s notice to design your website, write your marketing collateral and develop your social media content. Freelancers (also known as “independent contractors”) benefit owners and managers of small and midsize businesses in several ways:
- Control rising costs: Keep employee count and staffing overhead low.
- Gain specialized expertise: Access highly skilled marketing and creative service professionals on demand.
- Scalability and flexibility: Pay for the services you need on a per-project basis.
- Avoid commitment: You are never stuck with a poorly performing employee, or one who isn’t continuously busy.
Freelancers now account for more than 35% of U.S. workers, according to Forbes, and several major studies project this figure to continue rising. We see demand for freelancers rising among many of our own client companies who reap the benefits of their services.
The government has an interest in understanding your working relationships
As this trend develops, the government is growing increasingly interested in maximizing its tax revenue, since companies don’t have to pay or withhold income taxes, Medicare, Social Security, or unemployment taxes for freelancers. Conversely, with a W2 employee, the government gets immediate tax revenue through withholding, there is no risk of non-reporting, the worker can’t write off expenses and the employer pays into funds for unemployment insurance, workers compensation and disability.
The government is also wise to the fact that many employers are relying on freelancers to stay under the 50-employee threshold that would require them to pay for employee health insurance under the Affordable Care Act. As a result, many companies have been audited by the IRS for misclassifying workers as independent contractors (versus employees).Below are some items to take into account when considering hiring freelancers.
Know the difference between independent contractors and W2 employees
The Small Business Association defines the two terms as follows:
Employee: Performs duties dictated or controlled by others; is given training for work to be done; works for only one employer.
Independent contractor: Operates under a business name, has his/her own employees and maintains a separate business checking account; advertises his/her business’ services; invoices for work done; has more than one client; has own tools and sets own hours; keeps business records.
If more information is needed to decide about the nature of a working relationship, you may want to consult the compliance manual from the Equal Opportunity Commission. While these descriptions may appear simple on their face, there is a multi-factorial test used to ultimately determine whether a worker is an independent contractor or an employee.
Determine that the worker is a legitimate freelancer
Experienced freelancers usually operate through separately incorporated entities and they often have business bank accounts and business insurance in an effort to make clear they are truly independent contractors. Creatives and marketing freelancers almost always have their own websites and marketing materials. If the person is not established as a freelancer, talk to your legal counsel about whether you may be better off classifying the individual as a W2 employee.
Issue a Form 1099
All independent contractors must be issued a Form 1099. If your company is ever audited, the IRS will ask for this form as proof of the nature of the employer-freelancer relationship.
Put agreements in writing
Contracts between employers and freelancers don’t have to be extended documents, full of legalese, but you should Keep a concise boilerplate contract on hand that can be modified to detail the nature of each freelance assignment. Signed copies of all such agreements should be retained in your records to document the relationship. Include a clause that specifies that any work created by the freelancer will be a work “made for hire” that belongs to the employer. This will ensure that your organization maintains the legal rights to intellectual property created by the freelancer, such as website content or a company logo.
Don’t exert too much control
An employer is entitled to more control over an employee than a contractor. Contractors are given assignments and told what needs to be done, but they are not supervised. They should also not be given equipment such as a laptop or cell phone. Be careful with setting such tight deadlines that it would give the appearance that a contractor would essentially be working full-time for you, and avoid having contractors work at the office unless it is on a rare and necessary occasion.
Pay by invoice
A hallmark of independent contractors is fixed-fee, per-project invoicing. Make sure that your freelancers issue invoices for each project. Avoid paying by the hour, paying retainers, paying bonuses, or reimbursing expenses. Agree on payment terms in advance and be sure to pay on time.
Finally, avoid this red flag
Good contractors have multiple clients, unless they are just starting out. If you hire a freelancer that has no other business, make sure he or she is actively marketing to other prospective clients, as well as incorporating and establishing a business bank account. The government may take notice of a contractor on your books who has no other clients.
Understanding these considerations will help your company benefit from this fast-growing trend that benefits employers and freelancers alike.
This article is for information purposes only and is not intended to provide legal advice. Readers should consult their own attorneys for specific legal advice regarding this subject matter.
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