LLCs don’t always have the ability to hire a part- or full-time employee for a project. Here’s how it works when you are hiring independent contractors as an LLC.
Get It in Writing
Just as you should always have a clear contract when you are an employer or employee, or even just entering into a good-faith partnership for a limited time, you should know your rights and be transparent with your expectations.
For your own safety and peace of mind, you should have a written contract drawn up any time you hire an independent contractor (even if that person is your family member or friend). You’ll also want to make sure you have proof of a real and separate business. Whether this comes in the form of a project estimate complete with letterhead and logo or you take a screenshot of an applicable landing page on the independent contractor’s website.
Make Sure They are Considered a True Independent Contractor
There isn’t a perfect set of criteria that defines what an independent contractor is. That means you have to do your research – make sure they qualify as an independent contractor.
Legal Zoom has some great examples of circumstances that might raise red flags as far as determining an independent contractor’s status:
- A former employee is rehired to do work similar to their old job, even if temporary or part-time
- An intern is doing actual work, not just shadowing or learning; be sure to check the six criteria related to interns
- You provide the equipment, supplies, tools, or ongoing office space the worker uses
- The worker replaces one of your employees or supervises any of your employees
- The relationship is ongoing and long-term, not project-based
Keep Up on Department of Labor Standards
The Balance SMB recently reported that the Department of Labor has developed new standards for determining independent contractor vs. employee status. The ruling was set to go into effect in March of 2021, but currently, all regulations were frozen by President Joe Biden and his administration so they could thoroughly review each one before putting them into effect.
As of May 2021, SHRM reports that this new set of standards has been withdrawn, but they also make note of the idea that the current administration favors a different approach to determining the difference between independent contractors and employees. These standards could change anytime in the near future, so if your LLC is thinking about hiring people to do some work, you’ll want to make sure you are caught up on the most recent changes.
Income Tax Withholding for Independent Contractors
Typically, your LLC will not need to withhold income taxes from payments to independent contractors. While there are some exceptions to this rule, you don’t have to withhold anything until the IRS sends you a backup withholding notice.
Filing Taxes with Independent Contractor Expenses
If the work your independent contractor is doing for you totals more than $600 in a given tax year, then you have to get a W-9 from the contractor, and you must fill out Form 1099-NEC (in most cases). The 1099-NEC is the form for reporting non-employee income on your taxes. You’ll likely also have to fill out a Form 1096, which is akin to a summary of your information returns, and then send it directly to the IRS.