How Can an LLC Hire Freelancers or Independent Contractors?

If a business owner is looking for some assistance with their limited liability company (LLC), but they’re not ready to hire full-time employees, they might be interested in enlisting the help of a reputable freelancer or independent contractor.

Freelancers can be a great help to a young, growing business by taking on work the owner can’t handle on their own, without placing the demands on the business that an employee would.

This guide explains all the basics that business owners should know about hiring freelancers for an LLC: what a freelancer is, how to hire one legally, and how to avoid pitfalls like treating a freelancer like an employee.

What is a freelancer or independent contractor?

The role of a freelancer or independent contractor is relatively straightforward. These are individuals who are self-employed, typically providing business services to other companies. In general, these are people over whom a business owner has no actual control, as they are independent entities existing outside of the typical employer/employee relationship.

In addition to this personal independence, freelancers or independent contractors also operate outside the direct control of a business financially. This means that they determine their own rates of payment, and an entrepreneur who is considering hiring them can choose to either pay those rates or not — the business owner lacks the ability to increase or decrease their pay without them agreeing to the change. In addition, whereas a business owner would be responsible for withholding taxes from an employee’s wages, that same owner wouldn’t withhold employment taxes from a freelancer’s payments. Independent contractors handle those payments themselves.

Arguably, the most important distinction is what type of working relationship the business has with the freelancer. Employees receive benefits including health insurance, retirement benefits such as a 401k or pension plan, vacation time, sick leave, etc. On the other hand, an independent contractor sacrifices these benefits in exchange for their independence as workers.

A business owner’s relationships with these freelancers may be ongoing, but if so, the work they complete must either be considered non-crucial to the business’s success or they must be allowed to perform their work on their own schedule.

Quick Note: A business owner can still set project deadlines, of course, but they cannot control when the freelancer performs the work between the moment it’s assigned and the moment it’s due.

One of the trickiest aspects of the “employer and employee” vs “business owner and freelancer” relationship is that there is no cut-and-dry distinction between the two. The factors discussed in this section help illustrate which type of relationship is being forged, but a business owner will need to analyze all of these aspects as part of a whole. No one factor is the definitive one that flips a switch that turns a freelancer into an employee.

If a business owner isn’t quite sure, there is actually a government program that can help them figure it out. All the owner needs to do is fill out Form SS-8, which is titled “Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.” When an entrepreneur sends this completed form to the Internal Revenue Service, the IRS determines whether the worker is an employee or not. This program can take up to six months, but it can be quite helpful if someone needs a neutral third party to help determine a worker’s status.

How to Hire a Freelancer or Independent Contractor

With any independent contractor a business owner hires, they’ll need to agree upon a contract with that person. This agreement outlines the freelancer’s responsibilities, as well as how much the business will compensate them for their work.

Depending on the nature of the work, a business owner might decide to include a confidentiality or non-disclosure agreement, a clause that sets guidelines for the termination of the relationship, and/or a determination of who is responsible for purchasing any relevant supplies that are necessary for completing the assigned work.

Step 1) IRS Form W-9

The first step an LLC owner needs to complete with the IRS when hiring a freelancer or independent contractor to perform work for the company is providing them with an IRS Form W-9. This form is where an owner gets some basic information about the worker, including their name, address, and identification number, which can be either their personal Social Security Number, a federal tax ID number, or an EIN (Employer Identification Number) if they have a formal business entity of their own.

Step 2) Form 1099-MISC

Next, if an entrepreneur anticipates paying the freelancer at least $600 over the course of the year, they’ll need to complete Form 1099-MISC. This document is provided to both the independent contractor and the IRS and helps the freelancer determine their tax responsibilities for any given year.

Step 3) Form 1096

The third IRS form an owner needs to fill out is Form 1096, which is for the owner’s own purposes. This form summarizes a company’s activities with freelancers for the year, and it should be submitted in tandem with copies of every 1099 form the hired contractors filled out.

Step 4) Keep Detailed Records

Last but not least, business owners should take care to maintain detailed records, including copies of every form an independent contractor fills out. It’s important to have extensive records of this relationship in case the business gets audited, so it’s wise to keep a copy of every relevant document in a convenient and secure location.

In Conclusion

Hiring independent contractors or freelancers to perform work for a business is a relatively simple process, but it’s also one that an owner needs to make 100% certain that they’re handling correctly. There are some clear-cut advantages to hiring freelancers, as they can save the business money while also providing a level of flexibility that isn’t available with traditional employees.

However, there are also a few disadvantages, mostly centering on a lack of control over the worker. A business owner cannot dictate when they work, and if they don’t have enough work provided, they are free to go find other work at any time.