How to hire independent contractors

[Puglife]

I own a small technology company, and I would like to hire college graduates, as independent contractors to design my products. I was wondering, how exactly do I pay independent contractors, as well as what type of taxes do I pay for them? How do I file with the IRS, and more importantly, how does one become an independent contractor? for example, if I find someone I like, who I would like to hire as an independent contractor, and they are not already, what sort of process do we have to do? Do I just hire them as a independent contractor? Do they have to create some sort of company, or file some sort of thing with someone (like getting TIN)? Thank you, your help will be much appreciated.

[turboguy]

The process of hiring them is pretty easy. Basically you hire them, pay them for what they do and at the end of the year give them a 1099. I would suggest you have some kind of agreement that spells things out so you can justify having them do the work as independent contractors.

I would also suggest you study the IRS guidelines for determining if someone is an independent contractor or an employee. You don't want this to come back and bite you down the road.

They pay their own Social security and other taxes, you don't need WC insurance.

[Harold Mansfield]

I own a small technology company, and I would like to hire college graduates, as independent contractors to design my products. I was wondering, how exactly do I pay independent contractors, as well as what type of taxes do I pay for them? How do I file with the IRS, and more importantly, how does one become an independent contractor? for example, if I find someone I like, who I would like to hire as an independent contractor, and they are not already, what sort of process do we have to do? Do I just hire them as a independent contractor? Do they have to create some sort of company, or file some sort of thing with someone (like getting TIN)? Thank you, your help will be much appreciated.

The IRS has the answers to all of your questions. You can even call them. May as well go to the source
https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Forms-and-Associated-Taxes-for-Independent-Contractors

[tallen]

... you don't need WC insurance.

Be careful on this one --- you may need to verify that the contractors you hire are covered by their own insurance.

If you are at all worried about your potential liability exposure in hiring contractors, you should probably talk to your insurance agent, your business attorney, your state's worker compensation board, or perhaps your state's department of labor...

[turboguy]

One possible snag is if you furnish the equipment they work on such as a computer with a cad program and they do the work at your facility the IRS is likely going to consider them employees. If they do the work at their home, using their computer and you pay them by the assignment (not hourly) then the odds are good they would be considered independent contractors. I am guessing many would have a computer at home and there are some decent free 2D cad programs such as Draftsight which is the one I use so finding someone to do the work at home is possible. If it needs to be 3D cad like Solid Works then that may be harder to find but if they are engineering students they may have a student edition of Solid Works.

Usually for an independent contractor you can not provide the workspace, the tools or direct supervision.

[Puglife]

Can you supply them with a initial amount of money, so that they can buy the things needed to do that, but they still operate out of their house? Also, do they have to apply for anything with the IRS saying their independent contractors, such as do they have to create a company? Thanks for your responces.

[Puglife]

How do they pay their own taxes, is their a special form they file? and in order for them to be independent contractors, do they need some sort of tax identification number or have some type of license?

[tallen]

Can you supply them with a initial amount of money, so that they can buy the things needed to do that, but they still operate out of their house? Also, do they have to apply for anything with the IRS saying their independent contractors, such as do they have to create a company? Thanks for your responces.

You can pay them whatever you want to pay them, for whaterver purpose, whenever you want. The key is that they are a contractor -- which implies that there is some sort of a contract that specifies what they are supposed to do and what they will be paid to do it. The contracted fee can include whatever costs the parties agree to. Think of hiring a plumber to fix a leaky faucet, for example. If you have super special faucets that may require a rare unique tool to fix, the plumber might reasonably include all or part of that cost in his or her fee to you.

The other part of the equation is the independent part -- your contractors are in business for themselves. Again, think of the plumber that you hire to fix a leaky faucet. Basically what has to happen for them to qualify in the eyes of the IRS is (1) for them to behave as independent businesses and (2) for you to treat them as such. There is no application, form, or paperwork (well, unless they think you are treating them as an employee rather than an independent business, in which case they can ask for a ruling from the IRS).

My take, fwiw.

[Harold Mansfield]

Can you supply them with a initial amount of money, so that they can buy the things needed to do that, but they still operate out of their house? Also, do they have to apply for anything with the IRS saying their independent contractors, such as do they have to create a company? Thanks for your responces.


How do they pay their own taxes, is their a special form they file? and in order for them to be independent contractors, do they need some sort of tax identification number or have some type of license?
They're independent contractors. It's their responsibility to file properly with the IRS. All they need from you and you from them is the right form. 1099. The link I posted gives you all of that information right on the first page.

[tallen]

How do they pay their own taxes, is their a special form they file? and in order for them to be independent contractors, do they need some sort of tax identification number or have some type of license?

They will have to file a Schedule C with their 1040 tax return, detailing their income from their business activities; part of the calculation of their total taxes due will include Self-Employment tax (which covers the contributions to social security and medicare that employees and employers pay through payroll taxes). They may need to pay quarterly estimated taxes (since they don't have an employer to withhold federal income tax on their behalf), but that is their problem to solve themselves (since they are operating as independent businesses). Assuming they have not incorporated themselves, if you pay any one of them more than $600 over the course of the year, you will have to supply them with a 1099-MISC information return (of which copies also go to the IRS). You may want to collect a form W-9 from them so that you have the appropriate information you need to complete the 1099's. Actually I think the IRS would like it if you collected W-9's from all of the vendors that you pay any money to.. As long as they are a sole proprietor and don't have any employees of their own, their social security number is their tax ID number.

Again, just my take, fwiw.

[tallen]

Oh, as for licenses -- much depends on the specifics of the city/town, county, and state jurisdiction you are in. In general however, I think almost everywhere allows sole proprietors operating under their own name to do so without a general business license (but check with your local authorities!). If they are operating their business under a name other than their own, they usually have to file a "DBA" to register that business name with the State's Secretary of State. Also there may be additional licensing requirements depending on the specific trade or profession they are engaged in, for example: engineers, architects, geologists, doctors, lawyers, pharmacists, plumbers, electricians, contractors, hair dressers, manicurists, massage therapists, etc....

[Puglife]

Thanks, that was extremely helpful. So basically they have to own some sort of business in order to be an independent contractor for me? Is their any way around that?

[Harold Mansfield]

Thanks, that was extremely helpful. So basically they have to own some sort of business in order to be an independent contractor for me?

No. This is not true. Being an independent contractor, for your purposes, means that they are responsible for their own taxes. They aren't an employee, you're just hiring them for a specific purpose, therefore you're not paying payroll taxes for them. They pay their own.

https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Independent-Contractor-Self-Employed-or-Employee

(https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Forms-and-Associated-Taxes-for-Independent-Contractors)

[tallen]

They don't have to own some sort of business before being an independent contractor for you -- rather, they will become their own business as a consequence of being an independent contractor for you.