Independent Contractor Compensation
Independent contractor compensation is different from the process involved for paying a traditional employee.3 min read
What Is an Independent Contractor?
An independent contractor is an independent business owner who works on a contract basis doing work for a company. Independent contractors are not employees of the company they are doing work for nor are they under the direct control of the company. Anyone who is not an employee and doing work for your company could be considered an independent contractor. It is possible you may or may not have a written contract with the person or the company doing work for your business.
The Internal Revenue Service determines if a worker is an independent contractor or an employee based on the amount of control the person has over the work, the time of the worker, and the type of work being done for the company. Independent contractors are not eligible to receive worker's compensation coverage. State laws do not require employers to purchase coverage for independent contractors.
Whether there is a written or unwritten contract, independent contractors determine how a service is provided, who provides the service, and how the service will be accomplished. They work independently and free of the control or direction of the employer.
There are several ways an independent contractor can be identified:
- Independent contractors generally provide the equipment necessary to do the job.
- Consider the skill level necessary for the job.
- Independent contractors tend to work for more than one company.
Hiring an Independent Contractor
Hiring an independent contractor is similar to the process of hiring an employee, but when it comes to compensation, the similarities end. Contractors are paid based on the successful completion of the work at a set fee versus a flat 40-hour work week, for example. With no benefits involved, compensation for an independent contractor is based on the value of the work alone.
A contractor will present their own salary breakdown, which may be by the hour, by the quantity, by the piece, or by the entire project. In this aspect, independent contractor salaries are negotiable. To keep the pay competitive by looking at the pay rates for someone hired to do the same job, check the applicable region at the website for the Bureau of Labor and Statistics.
Paying an Independent Contractor
Three things are required before you begin paying an independent contractor:
- An Employer ID Number.
- An application or resume/CV.
- A written contract.
Once the contract worker is hired, before they can be paid you must have a Request for Taxpayer Identification Number and Certification (Form W-9) form signed by the worker. The form identifies the independent contractor using the tax identification number and provides additional information needed to complete payments and submit to the IRS.
Independent contractors may be paid on an hourly basis, such as a computer programmer working on a series of tasks. Contractors may also be paid for work completed or by the job. An example would be a blogger who is paid by the number of blog posts written whereas a cleaning service is paid a set amount for cleaning an office.
Either way, the pay rate is determined in the contract, which may be verbal or written. However, written is preferred as all details relating to the payment will be in writing to avoid any misunderstandings. Other terms/conditions pertaining to the payment should be included in the contract. These include:
- How often is the payment due?
- What are the milestones for payment? This would outline specific deadlines for work to be completed and a specified amount of pay released.
- What happens if the work is not completed on time?
- What happens when the payment is not made on time?
- What recourse is there if the work is not acceptable?
Independent contractors are responsible for paying their own income taxes and self-employment taxes. So, in most cases, federal or state income tax is not withheld from an independent contractor's pay. In the event the taxpayer ID is missing or incorrect, it may be necessary for you to withhold federal income tax from the independent contractor's payment(s). This is known as backup withholding.
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