Hire Employees and Independent Contractors

There are 2 ways to hire for a business:

  • Contractors

  • Employees

Independent Contractors

Independent contractors are hired to perform general tasks without specific instructions. They are free to choose the way and means the task is performed and the employer is limited to setting the general result expectations. The employer cannot tell the contractor when and where to work, micromanage by requiring constant progress reports and providing coaching as well as forbid the contractor to provide similar services to others. Employers have few to no responsibilities to contractors. They are not required to withhold taxes from contractor's payments, not required to pay minimum wage or provide worker's compensation insurance. Upon termination, employers, typically, are not responsible for paying for contractor's unemployment. Either an individual or a legal entity can be a contractor. Despite the word contractor, a formal written contract is not mandatory, though recommended. When hiring a contractor the following steps must be completed:

  1. Complete form W9: This form will provide key information about the contractor, specifically the full name, address, legal type (individual, llc corporation etc) so the employer can correctly report payments made to the contractor.

  2. Report a new hire to the employment development department of the state where the contractor will perform his or her duties. While not every state requires this step, many states such as California, Illinois and Florida do.

  3. Before February 1st of every year send 3 copies of the form 1099-NEC to the contractor, the IRS and the state of his or her residence. 1099-NEC will show all the payments made to the contractor during a calendar year, as well as voluntary withholdings if any. If the total payment to a contractor during a calendar year was less than $600, 1099-NEC is not required. The contractor will use the information on the form to correctly report it on his or her tax return and IRS and the state will make sure the information matches to the copies they received. If the contractor is a corporation, 1099-NEC is not required.

When paying a contractor, to satisfy IRS' record keeping requirements the employer should typically ask for an invoice outlining the name of the contractor, the name of the employer, the period during which services were provided and the total amount billed.

Employees

Employees work under the direct control of an employer. Employer can set work schedules, work locations, detailed instructions on how tasks should be completed and micromanage employees. For example, employer can require a sales employee to contact 25 prospects a day and send a report by the end of a day. With all that control also comes responsibility. Employer must pay at least a minimum wage, withhold taxes from paychecks, buy worker's compensation insurance, contribute to unemployment pay upon termination, reimburse for work related expenses and provide certain perks and benefits that vary by state. For example, California requires employers to provide a retirement plan to employees and health insurance if an employer has more than 5 employees. When hiring an employee, the following steps must be completed:

  • I-9 verification. This form is used to verify whether the new hire is authorized to work in the United States and must be completed before the official start day to avoid any potential penalties. You can download the form and instructions at https://www.uscis.gov On page 3 of the form you will find the list of acceptable documents to establish employment eligibility. The most commonly used documents are a US passport, Green card, Employment authorization document or a combination of a state issued id such as a driver license and a social security card that doesn’t say “Valid for employment with DHS authorization only”. While this are the most popular ones, you may see other eligible documents too. It is illegal in the United States to deny employment or terminate an employee based on the type of the document presented. Therefore it is important to carefully read the page 3 of i-9 to make sure the presented paperwork meets the USCIS’ requirements. Businesses may choose to use an online E-verify (https://myeverify.uscis.gov) system for better security but it is not mandatory. Once the i-9 form has been filled out and the required documents were presented you should keep the form in an accessible place in case of an audit. You do not need to send the i-9 form to USCIS.

  • Have an employee complete the form W-4. This form will provide with the information necessary to determine the correct amount of tax withholdings from pay, as well as contains basic information about the employee such as name, social security number and address.

  • Background checks. While for most jobs this is not required by law, it is not a bad idea to make sure people that work for you don’t carry any unnecessary baggage. Most employers choose to contract third party companies.

  • Obtain an EIN number if you haven't done yet.

  • Obtain a state payroll account number or sein. Payroll account number also known as state ein is used to report and pay state taxes for employees. This largely varies state by state and generally your payroll provider can assist you with obtaining that number.

  • Buy worker's compensation insurance. This insurance is required by most states. It compensates employees in the event of an injury at work. In most cases you can buy it from your payroll provider.

  • Health Insurance and Retirement plan. While this may not always be required by law it is a good idea to provide some sort of health care coverage and a 401k plan. You can also buy them through your payroll provider.

  • Find a payroll provider. Payroll providers are third party companies that withdraw money from business’bank account, withhold and pay payroll taxes and direct deposit the rest into the employees account. Many of them also take care of reporting requirements such as sending W2 forms.

  • Provide employee with required labor posters and employee handbook. Employee handbook is not mandatory but it outlines key behaviorial expectations such as timekeeping or attendance policy and protect employers from wrongful termination lawsuits.

  • Report new hire to the state of residence.

  • Run your first payroll. Before January 31st of each year an employer is required to send from W2 to employee summarizing all payments and withholdings during the previous year.