Updated: Jun 17
Recent data show that the percentage of freelancers in the U.S. workforce is increasing. It is likely that, at some point, you will have to decide between hiring an employee or a freelancer for your business. Making that decision can be tricky, but understanding the specific role that freelancers, also known as independent contractors, play in the labor market will help you make the right choice for your business. QS2 Point shares some tips on finding the right freelancers.
Employees vs. Independent Contractors
The IRS has specific criteria for deciding whether a worker is an employee or contractor. Broadly speaking, independent contractors determine how and when to work. They have more control over their daily routine and generally work for more than one business during the course of a year. Freelancers typically do peripheral tasks for a business. For example, a lawn care company may hire a freelancer to perform bookkeeping or marketing tasks.
Employees, on the other hand, work a schedule set by the employer. The employer determines how the work is carried out and has primary control over the project. Employees generally work in the company's primary field. For example, the person doing the mowing and edging for a lawn care company will likely be an employee, especially if an owner or manager sets the schedule and provides the equipment for the work.
If you want to get more details on how contractors, employees, and contractors are different, BSA (Best Staffing Agencies) published an excellent article explaining such differences.
Hiring a Freelancer
As with all hires, there are pros and cons to hiring a freelancer. However, doing your due diligence during the hiring process will help you find someone reliable who will do quality work.
First, check out freelance hiring sites to look at prospective hires. If you know other business owners who have hired freelancers, ask for recommendations. Craft a list of interview questions. If the contractor will be working remotely, tailor the interview to include questions about accessibility and communication. Ask for and check with references provided by the interviewee.
Complying With the Law
Because business owners are not required to pay certain taxes when they hire freelancers rather than employees, many are tempted to classify all their workers as independent contractors to save money. However, this opens the business up to lawsuits and fines. If the IRS or Department of Labor determines that your worker should be categorized as an employee, then you cannot legally treat that worker as an independent contractor.
If you hire genuine independent contractors, it is important to complete all necessary paperwork. You will need a written contract to ensure that the freelancer understands what is expected and so that any disputes can be resolved diplomatically. Additionally, you will need a way to keep up with payments made to independent workers. Even if you pay cash, you are still required to file a 1099-NEC with the IRS for anyone to whom you paid more than $600 during the year.
If you use accounting software, it may have a feature that allows you to keep up with payments to freelancers, or you can keep the information in a spreadsheet. Plus, payroll systems often provide things like automated processing and automated tax payments, so you never have to worry about missing a pay date or incurring tax penalties. Explore various systems to find one with the bells and whistles that make sense for your company.
Freelancers can be a valuable asset to your company. Hiring such workers allows you to complete projects while keeping total payroll costs down. However, losing money because of sloppy freelance work or tax penalties is possible if you do not hire reliable, professional independent contractors and report all qualifying earnings to the government.