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I’ve done a lot of blog posts about what to do if you’re the contract labor, but the other day I had a client ask me about hiring contract labor. Here’s what you need to know if you’re doing the hiring.
First, you don’t need a “contract” with them. Contract labor is a term that’s used to mean they are working for you, but they are not on the payroll. For some things, it’s good to have a contract, but often it’s not necessary.
Second, never pay in cash—always pay by check. A check shows where you paid the money to – it’s a paper trail of how your business spent it’s money. That’s a good thing. The number one mortal sin in business accounting is making cash payments. Never take cash out of the ATM for your business; never pay bills in cash. You can use a “petty cash” account for really minor things, but there should be receipts for everything and a check should be written for “petty cash”. Cash gets you into trouble so you have to be doubly careful with it. If you remember nothing else, remember:real businesses do not pay bills with cash!
Third, although you don’t need a contract for the people who do work for you, you do need to have them fill out a form called a W-9. Here’s a link to get the form: http://www.irs.gov/pub/irs-pdf/fw9.pdf
Say for example that John Doe was doing some construction work for your business and over the course of the year you thought you might pay him over $600. You would have him complete the W-9 form for your records. (I even had my own kid do a W-9 and I didn’t expect her to make over $600. It’s just a good business habit.) I recommend having your contract labor give you the completed W-9 before you make the first payment. This keeps your behind covered in case the IRS or one of the other taxing jurisdictions decides to audit your books.
Anyway, on the form, John Doe would list his name under “name”.
For business name, he would leave it blank unless he had a business with a different name like “John’s Construction Business.”
Under the business type, he’d be an individual/sole proprietor (once again, unless he owned a regular business that was a corporation or something.)
He’d put down his address, zip code etc. He probably wouldn’t have an account number for you, but if he did, he could put it in the box. It’s not necessary.
Requester’s name is “Your Business Name.” You don’t really need to fill that out, you know who you are. If he’s completing the form right in your office, it’s okay to leave blank. If you’re mailing it to him, then you should put your business information in that box.
The TIN is John Doe’s social security number, unless he has a business EIN number. A regular business will know the EIN number and use it. If the person doesn’t know what an EIN is, then he should put his social security number. This W-9 form gives you good records and will protect you in an audit.
Make sure your contract laborer understands that if he receives over $600 from you, then you will be reporting his pay to the IRS as non-employee compensation. You need to do this or else the IRS will not allow you a deduction for the money you paid him.
You will need to prepare 1099 MISC forms in January (they’re easy to do.) Your contract laborer will receive his form by January 31st. You’ll also be sending copies to the IRS which are due at the end of February.
Hiring contract labor is much easier than putting someone on the payroll, but you do have to remember the rules: pay by check, get a W-9, and issue a 1099 MISC. These three things will help audit-proof your contract labor.
Thank you Brenda,
That’s a great point!
In addition to the 1. Contract (if you elect to do one) 2, W-9 , 3. Paying by check, you will need a copy of their liability insurance certificate.
This your workers comp insurance carrier will request when they audit your payroll at the end of the policy year.
Hi Banessa,
As contract labor the business might pay you on a 30 day notice after you’ve billed. Who knows? But you say that you work for the company all year, five days a week. That sounds like you’re an employee, not contract labor. You might need to discuss this with the company you work for. But a contractor basically negotiates the payment terms with the company.
I have a question. If you are contract labor is there a set date of pay? Example, you work for this company pretty much all year five days a week. Should there be a set payday? Every Friday, every other Friday, daily ect. Can the employee pay weekly one month and by job next month?
Hi Commodityz–
For most people, I think you will want to be an employee instead of contract labor. Here’s why–as contract labor, you have to pay self employment taxes on what they pay you. Self employment taxes are 13.3% this year, and usually they’re 15.3.%, that’s in addition to any regular income tax you have to pay on your earnings.
As an employee, you will pay 5.65% in withholding–that is money your boss takes out of your paycheck to cover your social security and unemployment taxes. (Usually it’s 7.65% but this year is different.) But then your boss chips in an extra 7.65% in employer’s share of your social sec
urity and medicare (FICA) taxes.
In the short run, your take home pay check will be a little smaller because of the withholding, but in the long run, you’ll come out ahead because you won’t get hit with that horrible tax bill in April.
Here’s a link to a different post that explains it better: http://robergtaxsolutions.com/2010/09/employee-or-contract-labor/