In the very early stages of starting a business, it's common for entrepreneurs to burn the midnight oil putting the launch together. Unless determined to operate as a sole proprietor, every business owner knows he or she must write up descriptions for the jobs they have been covering until the wee hours if they plan to expand the business. At first you may not require a full time employee. So the question arises - under what circumstances is it correct to hire a 1099 contractor?
What defines a contractor?
In general the IRS tells us that when we use an independent contractor, the only control we have over them is the agreed upon price to do a job and the outcome of the work. They use their own office space, tools and personnel. In most cases they supply the materials needed and charge those costs to us. They get paid through an invoice, rather than through our payroll department. We do not withhold employment-related taxes. They are paid per-job or by commission and they have the right to do work for other companies.
How my marketing firm uses contractors.
As an Internet marketing firm, I we frequently hire contractors for components of a project that are short-term, rather than on-going. In these situations, we prefer to outsource the work because we can use a contractor with the specific expertise we need. For example, we have a client with several websites promoting his health clinics. We engaged a writer with a background in medical writing to provide the content for the web pages. Part of the contracting process was to have the writer fill out a W9 form so our accountant can provide a 1099 tax form at the end of the year.
We have also used contractors to build advanced ecommerce websites that could not be done by any of our in-house staff. We also contract out to an office cleaning and outdoor maintenance company to care for our facility. None of these activities involve enough man-hours to warrant hiring a staff person to do the work. Neither are we willing to purchase the tools and equipment necessary to do the work. We are a marketing company, not a landscaper.
Another area we are considering using 1099 contractors is in our sales force. Until now, our sales people have been in-house personnel, but a local solar energy company we know treats their sales people like independents. It saves money in payroll for expenses for the energy firm, and the sales people prefer it. As contractors they can claim expenses such as mileage on their vehicles and other expenses related to doing the work.
The IRS has specific rules and definitions that differentiate a contractor from an employee, so be sure to know the laws.
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