How to Legally Hire Independent Contractors for Your Small Business. When you need help with your small business, you will have to decide whether to hire employees or independent contractors, and knowing the difference can save you money. Hiring an employee gives you control over when and where this individual works for you, but it also makes you legally responsible for taxes. Consider hiring an independent contractor, but be aware of the guidelines that make this hiring situation tricky.
Determine If the Person You Are Hiring Is an Independent Contractor
Create a list of questions to find out if the person you are hiring for your small business really operates as an independent contractor. Ask for information about how the person has structured his or her own business, including the business name, if there is one.
Check or ask for licenses or permits that the independent contractor may need.
Ask for references from people who have previously worked with the independent contractor.
Ask to see any advertising the independent contractor has done, including listings in the phone book that may help classify the worker as an independent contractor.
Determine if the person is an independent contractor by asking for business cards, visiting a Web site or asking for correspondence on letterhead. While these aren't necessarily proof of business status, the chances that the individual is operating as an independent contractor are greater if these things are easily supplied.
Legally Protect Yourself When Hiring an Independent Contractor
Consider creating a written agreement or contract before you legally hire an independent contractor to establish pay, terms of employment and job expectations. This will establish the independent contractor relationship and help you avoid tax problems.
Seek out the assistance of a lawyer who specializes in tax or employment law to review any independent contractor relationships you may have established.
Make sure that independent contractors use their own equipment and hire help themselves to further define the independent contractor designation.
Use IRS Form SS-8 to determine whether someone qualifies as an independent contractor or as an employee (see Resources below).
Save copies of invoices your small business may have received to help prove the individual is indeed an independent contractor.
Not defining someone as an independent contractor can make you liable for paying Social Security and Medicare taxes as well as unemployment insurance.