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How to hire a contract employee for your small business in 9 simple steps

A contract employee can be a great way to grow your small business. You get the support you need with the flexibility to scale up and down according to your workload. It can be a big change compared to hiring a permanent employee, but the world of work is changing.

Nearly 15% of workers report being an independent contractor as their primary job, according to a 2019 Gig Economy and Self-Employment Report by Gallup. Contract employees also report higher satisfaction over a traditional job.

But how do you hire a contract employee? And is it right for your small business? This guide will cover best practices for finding, selecting, and onboarding a contractor.

1) Determine if your small business is ready to hire help

If you’re like most small business owners, your business is your baby. But like a child, a company doesn’t start mature or at its peak potential. Growing can be necessary for long-term success. Still, hiring can be a paralyzing event.

When to hire (and when not to)

Hiring too early can introduce cash-flow problems. But if you wait, you could miss growth opportunities. Some red flags can stand out and let you know whether it’s the right time to hire an independent contractor:

  • You’re turning down work
  • You’ve found a new potential revenue source
  • You don’t have time to do daily financials, bookkeeping, or paperwork
  • You need tasks done that fall under a specific skill set
  • Your company isn’t growing

However, you should also know the signs of when not to hire. For example, let’s say you’re a Texas small business owner. Now might not be a good time to hire your first employee in Texas if you feel desperate and overwhelmed and you’re not sure what you want the new hire to do. In that case, you might feel tempted to take the first person who comes along. Don’t.

Hiring without a plan is a mistake. Your new hire should complement your business, not drag it down. Take your time when looking for a contract worker to make sure it’s a good fit.

2) Know the difference between a salaried and contract employee

You might not think there’s much of a difference between a salaried and contract employee—but the distinction is crucial. Misclassification of an employee can mean serious tax penalties.

What is a contractor vs. employee?

According to the IRS, the general rule is that an independent contractor “has the right to control or direct only the result of the work, not what will be done and how it will be done.”

For example, a repair person who has their own shop, sets their own prices, and has their own tools, equipment, and supplies to complete the work is an independent contractor. On the other hand, the repair person is considered an employee if they work in a shop where the owner sets the prices and the hours and days the shop is open.

You’ll also discover different tax considerations and employer costs:

  • Contract employees are responsible for paying their own taxes—you don’t do tax withholding for income taxes or Social Security tax.
  • Contract employees aren’t eligible for benefits—you don’t have to pay healthcare, offer vacation time, or worry about paying minimum wage.

How to know the difference

You may have heard about a 20-factor test to determine employment status, such as this checklist from the State of Michigan. But the IRS says no “magic” or set number of factors exist. Instead, the IRS suggests you examine:

  • Behavior: Does the company control what the worker does and how the worker does it?
  • Finances: Does the company control how the worker is paid, or provide tools or supplies?
  • Relationship: Does a written contract exist, or does the company provide benefits?

However, each state can be different. For example, if you’re hiring your first employee in California, you need to know about the “ABC test” adopted by the California Supreme Court. It was signed into law in 2019, and the California Department of Labor has a guide for employers to follow the ABC test.

No matter which state you’re in, weigh factors carefully when hiring a contract employee. Suppose you get caught misclassifying an employee as an independent contractor. In that case, you are responsible for paying back taxes, unemployment, workers’ compensation liabilities, and benefits you should have been providing all along.

3) Understand the pros and cons of hiring a contract worker

A contract employee can provide significant advantages over a part- or full-time employee. However, you must also consider the drawbacks to determine if it’s the right move for your business.

Pros of hiring a contract worker

A contracted employee can offer more flexibility, a wider pool of applicants, and save you time and money:

  • More flexibility: Increase or decrease your workforce to fit the needs of your business.
  • A wider pool of applicants: Find the right person with the right skillset, so you get the best person for the job.
  • Save time and money: You don’t pay taxes or benefits, and save time because contractors require less administrative work.

Cons of hiring a contract worker

For all the benefits, independent contractors aren’t right in every situation. You may not want to hire a contract employee if:

  • You need long-term staffing support: Contractors can’t work more than 1,040 hours per year for a single employer in some areas.
  • You have short deadlines: Contractors set their schedule and may not be able to meet short deadlines or complete urgent projects.
  • You have specific business hours: A contractor’s hours can’t be dictated by the business (otherwise, they could be classified as an employee).

4) Write the job description

Now that you understand what it means to hire a contract employee and how to know if it’s right for your business, it’s time to take the next step: Writing a job description to attract and retain workers.

The job description

Job descriptions are common for full- and part-time employees. But they can help when hiring a contract employee, too.

To write a job description, first list the tasks you’d like help with. You can research job descriptions for similar roles on career sites (Indeed, CareerBuilder, Monster, LinkedIn) to brainstorm skill sets and responsibilities.

Your job posting should include the tasks, skills, and qualifications you’re looking for in a contract employee. Additionally, have a job title that a job seeker might look for, such as:

  • Independent contract
  • Contract basis
  • Independent contractor
  • (Role name) Contract

5) Choose the best contractor for the job

Finding, screening, and selecting the best candidate can seem overwhelming. Knowing where to find a contract employee and how to check credentials can help you find the right one.

Often, the best way to find help for your small business is to use your network. To start, ask your employees if they know anyone who might be a good fit. According to the Society for Human Resources Management, employee referrals account for more than 30% of all hires.

You can also create a job listing on LinkedIn, Indeed, and other popular job sites.

How to screen applicants

Hiring is a lengthy process. You might feel overwhelmed by this point—but screening applicants might be the most important step. You want someone that has the right skills and know-how and will complement your business.

To streamline the screening process, you might:

  • Check credentials with the skills you’re looking for
  • Schedule a short 10- or 15-minute phone interview
  • Review social media networks
  • Conduct virtual or in-person interviews

A background check can also be helpful, depending on what you’re hiring for. For example, if you’re hiring a bookkeeper, a background check can confirm the person has no felony convictions.

6) Create a contract

Once you find the right applicant, you need to put a hiring contract in place. A contract is a legally binding document that protects you and the contractor. The independent contractor agreement should include:

  • Details about the tasks and requirements
  • Project timelines and deadlines
  • Information about pay rates and billing terms
  • Sections for nondisclosure and confidentiality
  • Choice of law where the agreement will be enforced
  • Termination clause

Contract templates are available from sites like RocketLawyer and LegalZoom. However, state laws can determine what needs to be in your contract, so it’s best to have a lawyer draw up your contract employee agreement.

7) Get new hire paperwork for independent contractors

Even though you’re hiring a contractor, you’ll still need to complete a few legal to-dos—including new hire paperwork:

  • A signed contract agreement
  • Resume or professional qualifications
  • Form W-9 Request for Taxpayer Identification Number
  • Form 1099 (if you pay the contractor $600 or more during the tax year)

The W-9 serves the same purpose as an IRS Form W-4 for employees. It provides you with their current address and tax ID number (Social Security number or Employer Identification Number from the IRS).

The IRS has strict regulations around when you should and shouldn’t file a Form 1099-NEC or 1099-MISC. Generally, you must send a 1099 to the contractor if you pay them at least $600 over a year.

You may also want to get a copy of the contractor’s small business insurance or professional liability policy. If they make a mistake or don’t deliver as promised, you may be able to recoup some of the loss they caused.

As a small business owner, you’ll want to hang on to every document related to your work with the contractor, including contracts, invoices, and proofs of payment. An organized system to track and store records can keep your relationship with the contractor going smoothly.

8) Determine how you’ll pay your contract employee

Paying a contract employee is much simpler than paying a permanent employee. You don’t typically have to withhold payroll taxes (income tax, Social Security tax, Medicare tax), pay unemployment tax, or deduct the cost of health insurance premiums or other benefits—contractors are responsible for reporting and paying their own income taxes and self-employment taxes.

You can pay by the hour or by the job. Before you pay, ask for an invoice. It can serve as a record of services performed and provide a way for you to track payments made. To pay the invoice, you have a few options:

  • Write a check
  • Pay by direct deposit
  • Use a payroll provider
  • Use PayPal or a similar service

Some employers prefer to pay by check—it can be simple and easy. But some independent contractors prefer payment to come electronically (PayPal, Freshbooks, Quickbooks) because they receive their money much faster. Keep in mind if you opt for direct deposit, you should get their written authorization first.

9) Follow best practices for contractor onboarding

Part of your monthly checklist for small business health includes checking on your employees. Since contract employees are short-term—not permanent hires—you might be tempted to skip onboarding or do an ad-hoc thing.

But a great independent contractor relationship starts with an excellent onboarding experience. It can help your contract employee be successful, do a good job for your company, and serve as a template for the next time you hire a contractor.
Here are some tips for an effective onboarding process:

  • Create a meeting point for their first day
  • Collect paperwork like the W-9 and contract agreement
  • Grant access to necessary software, tools, and keys
  • Have a knowledge base that documents what they need to know
  • Review expectations, deliverables, and deadlines
  • Do any training that might be necessary

Onboarding doesn’t end after the first day—or even the first week. Ask them how things are going once the project is underway. Keep communication open so you can address and resolve any issues that might come up.

If you’ve hired a long-term contractor (a few weeks or a month or more), schedule regular check-ins to ensure the project is going smoothly. Then, once the job is complete, ask for feedback about what went well, what could have been better, and their overall impression. It will help you make an even better experience for your next contract hire.

Great job! You made it through hiring a contract employee! While you’re here, take a minute to make sure you have the right insurance coverage in place for your small business. Insurance from Huckleberry is affordable and easy to manage. Get a free quote today—it’s completely online and hassle-free.


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Disclaimer

All content on this page is for general informational purposes only and does not apply to any specific case, is not legal, tax or insurance advice and should not be relied upon. If you have any questions about the situation for your small business or the latest information in your state, you should contact an attorney for legal advice, an insurance agent or broker, and/or your state's labor or industry agency, board, commission or department. Please note that the information provided on this page may change at any time as a result of legislative action, court decisions or rules adopted or amended by any state or the federal government.

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