A Comprehensive FAQ on How to Hire a 1099 Contractor
If you have a short-term need for extra staffing, you may need to engage a contractor, but before you do, it’s important to understand how to hire a 1099 contractor. Be sure you know all of the legal elements of the hire before you proceed.
For many decades, employers chose to classify their workforce as employees to manage customer expectations, workflow, productivity, and staffing levels. The rise of the gig economy has highlighted the differences between contractors and employees and increased the number of people who are working as independent contractors. The IRS and the State of Maryland both lay out the rules for hiring a 1099 contractor, along with how they are to be paid.
Definition of an Independent Contractor
An independent contractor is a free agent that cannot be controlled by an employer as if they were an employee. In contrast, an employer can control an employee in exchange for certain consequences, such as payment of payroll tax, schedules, wearing of uniforms, and more. Employers who are looking to hire 1099 contractors instead of W-2 employees need to be aware of what they’re getting into before they take on a contractor. Here’s a definitive guide and FAQ on how to hire a 1099 contractor.
What are the IRS Rules for Independent Contractors?
The IRS uses common law rules to determine the status of a worker as an independent contractor or employee. According to the IRS, “under the common law rules a worker is an employee if the firm has the right to control what will be done and how it will be done.” The IRS has a control test with three main categories for determining whether a worker is an independent contractor or employee. They include:
- Behavioral control
- Financial control
Behavioral control evaluates the control a business has over the way an employee does their job. Financial control involves the right of the business to control the economic aspects of the worker’s job. Relationship defines how the worker and the business view their relationship with one another. If you’re still wondering what the IRS rules are for independent contractors, Form SS-8 can help employers figure out the status of their employees. This form is usually used by employers and workers to ask the IRS for a determination on the status of their employees, but it can also be used as a worksheet.
How Many Hours can an Independent Contractor Work?
Generally, an independent contractor can work as many hours as they want or need to complete the work they’ve been contracted to perform. In the event you and the contractor agree upon a specific amount of pay for the job, but not how many hours are needed for completion, the contractor must work for as many hours as it takes to finish the work. In fact, this is the spirit behind the independent contractor classification: To perform and complete work as outlined by a verbal or written agreement between employer and contractor. The contract can be as simple as delivering an item from one place to another, or it can involve gaining exclusive access to the talents of an individual for a defined project.
Employers and contractors are free to enter into an agreement that defines the amount of time the contractor has to complete the project, along with setting a deadline. The contractor has to deliver a finished product by the deadline or risk not getting paid.
For example: An employer gives a contractor a deadline of 30 days from the start of the project to completion and subsequent payment. The employer adds in a bonus for completing the project ahead of schedule. An independent contractor who agrees to the terms has already determined how much time it will likely take them to complete the project. If they feel the bonus is worth achieving, an independent contractor can work as many hours as they need to earn the bonus on top of the agreed-upon payment. Alternatively, the contractor can take the entire 30 days to complete the project and deliver it to the employer, but lose out on the bonus.
What are Examples of Independent Contractors?
Many occupations employ independent contractors because the classification makes more sense for workers and employers. The types of jobs done by 1099 contractors range from babysitting to accounting and just about everything in between. Here’s a look at some of the roles where workers are classified as independent contractors:
- Dance instructor
- General contractor
- Auto mechanic
- Hair stylist
- Truck driver
Just about any type of job can be a 1099 contractor position if the employer is willing to accept the lack of control that comes with the classification. However, not every occupation is suitable for contractors due to the need of an employer to control the scheduling, appearance, and behavior of an employee.
Do I need an EIN to Hire an Independent Contractor?
Yes, you need an employer identification number (EIN) to hire an independent contractor if you pay them more than $600 in one year. The EIN is an account number that’s used by the IRS to identify a business for taxing purposes. It’s used to report wages, payroll taxes, tax returns, and taxes to the IRS. When you hire a 1099 contractor, you’re paying them wages without the usual payroll tax deductions. The key word here is “paying.” The IRS wants to know when an individual earned money from an employer regardless of employment status, and you need to submit a 1099 to the IRS for all monies paid to a contractor in the previous year.
An independent contractor has to supply their Social Security number or their own EIN to an employer for their own tax records. An employer only has to report the income once for an independent contractor after the end of the year. It’s the responsibility of the independent contractor to pay their self-employment taxes throughout the year.
Can You Tell an Independent Contractor When to Work?
The short answer to the question is: No. You can’t tell an independent contractor when to work. The IRS and Maryland’s employment laws prevent an employer who utilizes independent contractors from having control over their working hours. An employer who wants to use independent contractors has to do so with the knowledge that they can’t control when an independent contractor works or doesn’t work. In sum, an employer cannot schedule an independent contractor for a specific shift.
Is There a Minimum Wage for Independent Contractors?
There is no minimum wage for independent contractors. A 1099 contractor gives up their rights to the protections and minimums guaranteed to them by federal and state law to work as they wish. Therefore, they do not have a minimum wage. The wages earned by a 1099 contractor depend on the terms of their agreement with an employer.
Is it Possible to Sign a 1099 Contractor to an Exclusivity Agreement?
The answer to this question is nuanced, and guidance from a business contract lawyer should be sought out prior to entering into an exclusivity agreement with a 1099 contractor. Part of the definition of an independent contractor is that they’re someone who has the freedom to work for anyone they choose, and can have multiple employers. An employer may have a desire to gain exclusive access to a contractor’s talents for a specific project or period of time.
The clearest course of action is to draw up a contract or agreement that outlines the details of an exclusive agreement and payment. These kinds of contracts are entered into all the time in many fields of employment. However, they could run afoul of the relationship portion of the IRS independent contractor test.
Signing an exclusivity agreement tilts the relationship into an area of controlling the contractor as if they were an employee. Some experts are of the opinion that this is an illegal action on the part of the employer. Other experts argue the opposite and feel that the contractor is still independent in the ways that matter to the IRS.
Employers and 1099 contractors should consult with a contract lawyer familiar with how the matter is handled and its legality. The lawyer can provide advice and prepare a contract that meets the needs of both parties without falling afoul of federal and state 1099 contractor laws.
Call Lusk Law Today for Help with Your Employee and 1099 Contractor Questions
Call Lusk Law at (443) 535-9715 to talk to one of our lawyers about hiring 1099 contractors and hourly employees. We’re here to help you understand the differences between different employee classifications, how to hire 1099 contractors, the advantages and disadvantages of both types, and which type of worker is best for your business. At Lusk Law, we’re advocates for life’s obstacles and opportunities.
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