Contractor Management

How to hire independent contractors: The ultimate guide

Mayank Bhutoria
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Are you considering independent contractors over full-time employees for your business? They may be the best option if you seek flexibility and cost-effectiveness.

Over the past decades, traditional employment methods have entirely revolutionized and generated new opportunities for employers and employees. A study by Upwork and Freelancers Union states that almost half of the United States workforce will consist of freelancers or independent contractors by 2027.

However, there are complexities in hiring independent contractors, particularly from abroad. Businesses must deal with legal compliances, time zone differences, cultural differences, payroll management, and international taxes. But the good news is you can overcome these challenges. 

In this blog, we’ll tell you how to hire independent contractors. So, regardless of your business size, this blog is a must-read if you’re considering hiring independent contractors. 

Why Hire Independent Contractors?

Independent contractors work for themselves and are not the same as regular employees. Employing independent contractors can bring various advantages to your business. Here’s why companies should hire independent contractors.

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1. Cost-effective

Hiring independent contractors can save additional costs for businesses. Unlike regular employees, you aren’t obliged to provide benefits such as health insurance or paid time off. Additionally, independent contractors generally work from their own premises, so you don't need to provide them with office space. Further, you are not responsible for paying employment taxes when employing independent contractors. This will reduce your business's administrative burden and potential tax liabilities.

2. Reduced legal obligations

Legal obligations when employing independent contractors. Independent contractors are responsible for their own taxes and insurance. Hiring contractors involves fewer formalities. Typically it involves signing a contract for a specific period that can be easily terminated at the end of the project. Also, the risk of legal disputes related to employment is less with independent contractors as they are considered separate entities.

3. Greater flexibility

Independent contractors offer greater flexibility in terms of availability and duration. Hence, they are ideal for project-based work. Hiring independent contractors makes organizations adaptable to changing business needs without long-term commitments. This, in turn, enhances operational agility and accelerates project timelines.

4. Access to a diverse talent pool

Hiring independent contractors lets you tap into a diverse talent pool and bring innovative ideas, fresh perspectives, and a broader experience to your projects. With geographical flexibility, the opportunity to work with experienced professionals worldwide opens up. It creates an inclusive and diverse work environment that brings innovation, expertise, and creativity.

5. Increased efficiency

Independent contractors are usually experienced professionals accustomed to working solo. They usually have skills, knowledge, and experience in different areas. This makes it possible to deliver quick results without much supervision. With their expert contribution to your business, you can respond better to emerging trends and evolving business needs. 

6. More scalability

Fluctuating market demands and workloads are common in business, and employing independent contractors allows you to cope with these changes better. With contractors in your workforce, you can scale up or down based on the workload without dealing with the challenges of hiring and training full-time employees. 

7 Steps to Hiring Independent Contractors

Until here, you might have thoroughly got the advantages of employing independent contractors for your business. So, now the question arises, how to recruit independent contractors? We have got it all for you. Here comes the 7-step guide on how to employ contractors:

1. Determine your business needs

Before embarking on the process, determine your business needs. It's the first and most essential step to ensure you hire the right contractors for your organization. This will align your hiring strategy with the organizational goals and objectives, leading to better outcomes. You need to understand the crucial differences between employees and contractors before deciding which one you need.  A few things to consider are:

  • Assess project requirements: 

Begin by assessing the project’s needs. Define the project or task scope and objectives. Identify what skills and expertise you need to complete the project successfully. This will bring clarity on the type of contractors you need to hire.  

  • Evaluate the resource gap:

Evaluate your existing workforce, and see if any resource gap needs to be addressed. Identify the areas where you need external resources or bandwidth to complete the project effectively. When you understand these gaps, it will help you to specify a skill set required for independent contractors.  

  • Consider legal factors:

Get familiar with legal obligations associated with employing independent contractors in your area. Understand the differences in laws when hiring regular employees and contractors. It will include labor laws, tax obligations, and worker classification guidelines. Misclassifying full-time employees as contractors leads to severe penalties in most countries. This will mitigate the possible risks and keep your business safer. 

The below image showcases the employee vs. contractor points that can help you analyze better.

employee vs independent contractor
Source

2. Create a job description

Creating a comprehensive job description is the second fundamental step in the process of how to recruit independent contractors. A well-drafted JD assists in setting up clear expectations and attracting the right qualified candidates for the project.  Some of the key elements that should be covered in your job description are:

  • Job title and objective:

Mention a clear and concise job title that exactly reflects the role of an independent contractor. Then, clearly define the objective behind employing independent contractors and how they will contribute to the project. 

  • Scope of work:

Mention the duties, responsibilities, and tasks the contractor must perform. Also, include how their tasks will be evaluated and their expected performance. 

  • Preferred qualification:

If you want any specific qualification your candidates should possess, mention it in the job description. Also, clearly state whether the qualification is mandatory or a good-to-have for the role.  

  • Project structure and duration:

Outline the estimated duration of the project and the minimum time for which contractors must commit. Also, mention the tentative start and end dates of the project. Also, specify who the contractors will collaborate with and report to during the project. 

3. Create a contract 

When hiring independent contractors, drafting a contract is an essential step. A contract acts as a binding legal agreement that specifies the terms and conditions, rights, payment terms, and commitments of the business partnership. Here’s what a contract must include:

  • Terms and conditions:

Specify the agreement's terms and conditions. Include significant specifics such as the terms of payment, the manner of invoicing, intellectual property rights, confidentiality duties, dispute resolution methods, and termination clauses. 

  • Payment terms:

Clearly describe the agreed-upon payment structure for independent contractors, including the payment rate, payment method, and any additional financial arrangements, such as guidelines and processes to be followed in case of reimbursement or milestone payments.

  • Law and compliance:

Ensure the contract complies with all applicable laws, rules, and professional standards. Include any specific employment clauses and cover tax or other legal requirements.

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4. Shortlist a few profiles

The goal is to find a few candidates who meet the required qualifications and will most likely be a good fit for the role. This can be done by shortlisting profiles from multiple sources, including job portals, professional networks, and recommendations from the current workforce.

  • Job portals:

Evaluate resumes and applications that have been submitted via job portals. Examine the candidates' backgrounds, talents, and other relevant details on their resumes to determine whether they meet your criteria.

  • Professional network:

Utilize professional networks like LinkedIn to find suitable applicants with the required qualifications. To evaluate their reliability and knowledge, consider their endorsements and recommendations.

  • Employee referrals: 

Encourage your present employees or contractors to recommend others. Ask for referrals from trustworthy staff members who may know potential candidates for the position. Assess these recommendations in accordance with how well they fit your requirement.

5. Onboard and manage paperwork

Managing the paperwork requires accurate documentation and record-keeping. Arranging and keeping copies of contracts, tax forms, agreements, and other relevant documents is crucial. Setting up a system for document storage not only helps with record keeping but also makes administrative tasks easier over the contract duration. Organizations can create an organized and professional working relationship with independent contractors by efficiently onboarding and managing the paperwork.

6. Complete the Legal to-dos

Completing certain regulatory procedures is an essential step, especially when you are hiring independent contractors. The critical task in this process is obtaining the necessary forms considering where you’re hiring independent contractors. 

For example, we have Form W-9 or W-8 BEN, and the 1099-NEC to hire a 1099 contractor in the US.

Form W-9 or W-8 BEN - In the US, organizations typically need to collect Form W-9 (for U.S. contractors) or Form W-8 BEN (for foreign contractors) from the independent contractor. These forms provide important information for tax purposes. Form W-9 includes the contractor's name, address, Social Security Number (SSN), or Employer Identification Number (EIN). Form W-8 BEN captures the contractor’s name, country of residence, and foreign tax identification number. Collecting these forms ensures compliance with tax reporting and withholding obligations.

1099-NEC Form - The 1099-NEC form reports payments made to independent contractors in the US. This is crucial when paying independent contractors. The hiring organization is responsible for providing this form to the contractor and filing it with the tax authorities. The form includes information about the contractor, such as their name, address, taxpayer identification number, and the total amount paid during the year.

On the other hand, in the UK, you don’t need to fill out forms when hiring independent contractors. However, ensure to draw a contractor agreement that includes,

  • An independent contractor clause
  • An NDA clause
  • An intellectual property clause
  • A termination clause

In Canada, you need not fill out IRS Form 1099-NEC when hiring an independent contractor. However, if the contractor is Canadian, they must fill out Form W-8BEN (or W-8BEN-E) to confirm that they are Canadian residents and are not subject to US tax withholding tax.

7. Implement best practices

Maintaining a seamless and successful engagement with independent contractors requires the implementation of some best practices. This facilitates effective communication, reduces the possibility of conflicts, and ensures effective collaboration.  Here are a few best practices you must implement:

  • Invoicing Procedure:

Establish a standardized and uniform procedure for paying independent contractors and managing their bills. Set guidelines for the format and timing of invoice submissions, ensuring they comply with any established payment conditions or milestones. Acknowledge invoices and take prompt action to resolve any differences.

  • Record Keeping:

Keep accurate and well-organized records of all communications, agreements, bills, and other paperwork related to the contractor. Effective record-keeping helps track the progress of projects, facilitates easy reference, ensures compliance with legal and regulatory requirements, and provides a historical record of contractors' engagement.

Hiring Independent Contractors Globally with Gloroots

Though we have provided a step-by-step guide on how to hire an independent contractor, it can be challenging for businesses to pull off the hiring process. Certain risks are involved in hiring independent contractors, especially when you’re building a global team of contractors. Here are a few of them.

Misclassification

Misclassifying contractors as employees or vice versa is a common issue in hiring independent contractors. “Independent contractor” and “employee” are more than job titles; each of these classifications has different responsibilities and rights. Improper management of these classifications can result in tax sanctions, fines, and hefty penalties.

Tax risks

Contractors are identified as independent entities. Hence, they file their own taxes, and organizations aren’t liable to provide them with benefits. However, due to the procedure's hassles, contractors often skip registering in developing markets like Vietnam Philippines. As a result, they end up breaking multiple labor laws.

Permanent Establishment risk

Permanent establishment risk refers to a fixed place of business in a country where an organization carries out its business activities. Hiring independent contractors can trigger this risk, making an organization liable to pay taxes in different jurisdictions.

When you hire independent contractors, your company’s legal status in a country may be vague. Hence, non-compliance with local tax regulations can result in penalties and lawsuits.

Moreover, tax laws vary by country. So, you must be familiar with the tax regulations governing your contractors based on where they reside. This can get challenging if you do not have the right platform to help you hire contractors globally.

With Gloroots, all the risks involved in hiring independent contractors can be handled. The platform can help you navigate the complexities of employing independent contractors while ensuring compliance with laws and regulations. Here’s what Gloroots can do for you:

✅Guarantee timely payments with efficient payroll management

✅Hire contractors and employees globally without setting up local entities

✅Curate the best-in-class localized benefits for employees across 140+ markets

✅Help you build and scale global teams of contractors and freelancers

✅Ensure compliance at all levels

✅Offer 24/7 support for a compliant and risk-free offboarding process

Want to learn more about our EOR solution?

Contact the Gloroots team now!

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