If you’re looking for some assistance with your LLC, but you’re not ready to hire full-time employees, you 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 doing work you can’t handle on your own, but without placing the demands on your business that an employee does.
We often hear entrepreneurs asking how they should go about hiring freelancers or independent contractors for their LLCs, so we decided to write this guide to explain how this process works. How can you legally enlist the assistance of a freelance worker, while also ensuring that the government doesn’t view that individual as an actual employee of your business?
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 who you as a business owner have no actual control over, 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 your business financially. This means that they determine their own rates of payment, and you as an entrepreneur can choose to either pay those rates or not — you lack the ability to increase or decrease their pay without them agreeing to the change. In addition, you are responsible for withholding taxes from an employee’s wages, but an independent contractor handles taxes on their own — you simply pay them their full rate without withholding anything.
Arguably the most important distinction is what type of working relationship you have 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.
As a business owner, your relationship with these freelancers may be ongoing, but if it is, the work they complete must either be considered non-crucial to the success of the business, or they must be allowed to perform their work on their own schedule.
Quick Note: You can still set deadlines for projects, of course, but you cannot control when the freelancer performs that work between the moment you assign it and the moment it is due.
One of the trickiest aspects of the “employer and employee” vs “business owner and freelancer” relationship is that there is no cut and dried distinction between the two. The factors we’ve discussed in this section help illustrate which type of relationship you’re forging, but you’ll 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 you’re not quite sure, there is actually a government program that can help you figure it out. All you need 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.”
You can send this form to the Internal Revenue Service, and they will determine whether the worker is an employee or not. We will note that this program can take up to six months, but it is quite valuable if you need a neutral third party to help you determine the status of a worker.
With any independent contractor you hire, you will need to agree upon a contract with that person. This agreement outlines the freelancer’s responsibilities, as well as how much you will compensate them for their work.
Depending on the nature of the work, you may also want 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.
The first step you’ll need to complete with the IRS when hiring a freelancer or independent contractor to perform work for your LLC is providing them with an IRS Form W-9. This form is where you’ll get some basic information about the worker, including their name, address, and identification number, which can be either their personal Social Security Number, or a federal tax ID number or EIN (Employer Identification Number) if they have a formal business entity of their own.
Next, if you anticipate paying the freelancer at least $600 over the course of the year, you will need to complete Form 1099-MISC. This document is provided to both the independent contractor and the IRS, and it is used to help the freelancer determine their taxation responsibilities for any given year.
The third IRS form you need to fill out is Form 1096, which is for your own purposes as a business owner. This form summarizes your company’s activities with freelancers for the year, and it should be submitted in tandem with copies of every 1099 form your independent contractors filled out.
The final note we’ll make in this section is that you should keep detailed records, including copies of every form your independent contractor fills out. You need to have extensive records of this relationship in case you get audited, so you should keep a copy of every relevant document in a convenient and secure location.
Hiring independent contractors or freelancers to perform work for your business is a relatively simple process, but it’s also one that you need to make 100% certain that you’re handling correctly. There are some clear-cut advantages to hiring freelancers, as they can save you money while also providing you with a level of flexibility that you don’t get with traditional employees.
However, there are also a few disadvantages, mostly centering on your lack of control over the worker. You cannot dictate when they work, and if you don’t provide them with enough work, they are free to go find other work at any time.
We hope this article helped you expand your understanding of the relationship between an LLC and an independent contractor!
Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
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