Hiring advice for startups: independent contractors vs. employees

In the past, organizations had to have office-based employees, but now it's easier to hire remotely. Affordable technology makes it easier to scale your business without huge investments. The growth of digital solutions means independent contractors can work just as well or better than employees. As your startup grows, you might have to weigh the pros and cons of hiring employees versus independent contractors. Your decision will depend on which option offers the best talent cost-effectively.

Advantages and Disadvantages of Independent Contracting

These contractors are also known as freelancers. They are motivated entrepreneurs who offer high-quality service because they want repeat business from their clients. Their objectives are likely to align with your organization's. Apart from giving good value, they also want to satisfy customers and earn profit. As tempting as their services are, you should only hire them after conducting a risk assessment.

One of the most visible advantages of hiring freelancers is cost savings. You only pay for the work you request instead of a fixed salary for potentially unproductive employees. Your business also avoids additional costs such as FICA and employee benefits. You can redirect these cost savings to higher priority tasks such as advertising, product development, and sales. Other advantages of hiring independent contractors are:

• You don’t need a large and expensive office space and equipment.
• You’ll have greater flexibility to hire and reduce your workforce due to fluctuating workloads.
• Freelancers immediately offer you premium skills without investing in training.
• This option reduces exposure to lawsuits by disgruntled workers.

The IRS goes to great lengths to monitor companies that hire independent contractors to avoid lost tax revenues. This potentially intense scrutiny is one of the drawbacks your business will encounter. Other disadvantages are:

• Unexpected demands for a pay increase if the freelancer experiences a rise in demand for their services.
• Insufficient control over assigned tasks.
• Lack of reliability and stability because freelancers can quit abruptly.
• Low chances of attracting the highest skilled workers because you don’t offer security and other perks that employees enjoy.

What to Look For When Hiring Independent Contractors

The process of screening freelancers should be as meticulous as hiring traditional employees. Although you want to save company resources, focus on long-term benefits by recruiting productive, self-motivated, and self-sufficient individuals. One way of determining their competence is by analyzing their skills and experience. A proficient independent contractor has a portfolio of samples and multiple genuine references.

They should also have excellent communication skills, which you can gauge by conducting a video interview. A pass means they'll be more likely to inform you of hitches and give valuable suggestions. Finally, their response time and accessibility are crucial to your success. In addition to delivering assignments on time, they should inform you of any hitches, make suggestions, and check in with you at agreed intervals.

What If You Run a US-Based Startup?

The law has provisions for hiring independent contractors. Your business could face IRS audits, fines, and other punitive measures if you misclassify your workers. Companies that refer to their employees as freelancers reduce government revenue because they don't withhold income and FICA taxes. The IRS and US Department of Labor provide businesses with guidelines to differentiate between employees and freelancers.

The tax agency lists 20 factors and three categories of evidence to help you make accurate decisions. Additionally, each state might have various tests depending on past court decisions. If you’re still unsure, it’s advisable to approach your employment lawyers for a clear legal interpretation. Before working with independent contractors, make sure to sign non-disclosure agreements, among other relevant contracts.

Guidelines for Overseas Startups

If your startup is based abroad, you should familiarize yourself with that country's laws. Additionally, if you hire independent contractors from a different country from where your business is incorporated, you should decide on the code that governs the contract. Apart from choosing from yours or the freelancer's local laws, you can settle on a third country's regulations. Make sure to consult your employment lawyers before making the final decision.

Relevant Documents for Hiring Independent Contractors

These details depend on the following scenarios:

1. Hiring a US-based freelancer by an American startup: You’ll need an independent contractor agreement, personal identification details, and a completed W-9. You must also file Forms 1096 and 1099 as required by the IRS.

2. Hiring a non-US independent contractor by an American business: Other than a contractual agreement and identification, individuals should fill Form W-8BEN (or W-8 BEN-E for agencies).

3. A non-American startup hiring a US-based freelancer: In addition to a contractor agreement, determine if the agency needs to file US tax returns. If yes, you should collect the necessary details, including W-9, and submit Form 1096 and 1099.

Vital Clauses in an Independent Contractor Agreement

Ensure you draft and sign a solid contract to avoid exposing your company to risks and losses.