Hiring independent contractors in the U.S. is an easy decision if you're looking to hire someone with specialized skills or are looking for top talent for a short-term project. After all, the country has a thriving workforce that is tech-savvy and ready to work remotely.
The U.S., like most countries, treats individual contractors differently than full-time employees, so you must be aware of the risk of misclassification. Additionally, each state in the U.S. has its own employment laws, so you must be careful to follow them.
But you're in luck!We can help you navigate compliance requirements to minimize the risks associated with hiring and paying contractors in the United States.
This article will walk you through the key aspects of hiring and paying contractors in the United States, including relevant labor laws, tax and compliance practices, and the documents you need to file with the Internal Revenue Service (IRS).
While there are many benefits to hiring skilled independent contractors from the United States, you must understand your responsibilities under U.S. law before entering into a contractual agreement with them.
First, you must understand the difference between hiring employees and independent contractors. Failure to do so can result in misclassification of employees and contractors, which can lead to severe penalties for your business.
According to the IRS, a worker is an employee when the employer has control over what and how the job is done. Whether the person is part-time or full-time, the status of a worker is determined by the substance of the work they do rather than the title.
An independent contractor, on the other hand, refers to a person who engages in an independent**, profession, or service. In general, employers do not have complete control over the work of independent workers. They can only control the outcome of the work, not what is done and how.
When deciding whether your employees are employees or independent contractors, you must consider how much control and independence they have in the roles you relate to.
If you can't determine whether a worker is an employee or an independent contractor after reviewing the guidance on the IRS, you (or the worker) can file an SS-8 with the IRS. They will review the facts and determine the identity of the worker.
Here are a few things to consider when hiring independent contractors in the United States:
Contractors are responsible for paying their own income tax and self-employment (SE) tax. SE tax refers to social security and health insurance contributions that are deducted from the wages of regular workers. They must report their income using a different tax rate** than the employee on the payroll.
Employers are not required to withhold any taxes from contractors. Note, however, that employers must require contractors to submit different **s depending on the contractor's workload and location.
If a business misclassifies contractors and employees, they may face penalties or be liable for back taxes.
One of the most important issues to be aware of when hiring independent contractors from the United States is the misclassification of employees and independent contractors. In fact, according to some estimates, in the United States alone, 10-20% of businesses misclassify their employees.
For example, misclassification can occur when a self-employed person works in a similar capacity to a full-time employee but misses out on a full-time employee's benefits, such as employee benefits.
Any misclassification determined by the IRS could be detrimental to the employer and result in them being liable to repay the additional tax owed. Tougher fines may be imposed, especially if the company is found to have deliberately misclassified employees.
In addition, misclassification puts a company's intellectual property (IP) at risk. When working with contractors, companies should focus on ownership of their intellectual property and invention rights. Failure to protect intellectual property when hiring independent contractors can have disastrous consequences for businesses, such as brand damage and costly litigation.
Employment laws in the United States are governed by the Fair Labor Standards Act (FLSA), which sets labor laws regarding minimum wages, overtime, working hours, record keeping, and child labor. These laws apply to full-time and part-time employees at the federal, state, and local**.
However, protections for employees generally do not apply to contractors. For example:
Employees are entitled to overtime pay for more than 40 hours per week, while contractors can work as many hours as they want at the same pay.
Employees are protected from unlawful dismissal, and if they are terminated, they are entitled to unemployment benefits. This is not the case for contractors, who are less protected from employer discrimination and retaliation.
Employees are entitled to family sick leave, medical insurance, pension and other benefits in accordance with the law. Contractors are responsible for paying their own benefits and paying taxes themselves.
It's not enough to classify your workers as independent contractors in the contract. You must also treat them as contractors to avoid misclassification.
Businesses need to understand the difference between contractor tax laws and employee tax laws.
There are three areas of general concern:
Federal employment taxes and related obligations, such as payroll taxes and income taxes
State Employment Tax.
Applicable federal or state labor laws.
In addition, companies must file certain taxes** when working with contractors to avoid classification and documentation issues.
W-9 Employer should have contractor fill out W-9 with the payee's correct name and taxpayer identification number. If required by the IRS, employers are required to keep this ** for four years to meet reporting requirements.
1099-NEC **If the employer pays a worker who is not an employee or contractor $600 or more per year, the company needs to complete and submit it to the IRS with a copy of the independent contractor. In some cases, it is not necessary to file a 1099-NEC **These exceptions are explained on the IRS**.
W-8 BEN ** Employers must also submit documents that the employer uses to provide information about their workers each year to facilitate income tax and social security withholding. The ** is voluntary, but its purpose is to help employers avoid confusion about the employment status of workers (and thus misclassification). It is the employer's responsibility to obtain and provide a W-8 BEN ** from employees and contractors
There is also a 1096 ** for reporting non-employee income to the IRS. However, it is only used when filing a paper tax return with the IRS by mail.
Independent contractors are required to file taxes on their income with the IRS, so companies do not withhold taxes from wages paid to U.S. freelancers. In addition, individual states and cities in the United States must also pay their own separate taxes on top of federal taxes, and these entities may charge different tax rates.
Sometimes it may be necessary to turn your independent contractor into an employee. This can happen if you decide to keep their services beyond the needs of a particular project. If a contractor has been working with you for a long time and can be considered an employee, you may even want to do so.
Converting contractors into full-time employees is a common way to ensure compliance with employment laws. But how do you know when it's appropriate to turn a contractor into an employee?
Some common signs that it's time for you to turn a contractor into an employee:
You want your contractor to take on additional job responsibilities at your company.
You recognize the contributions of your contractors and you want to retain talent by providing them with benefits.
You want to protect your company's intellectual property.
You want to renew their contract due to an update or change in the law.
You want to hire employees for longer and save money in the long run.
Processes can vary from state to state in the U.S., so you may need the help of a global HR partner who understands the requirements in your country as well as the requirements of the relevant U.S. labor laws to ensure a smooth transition.
There are a variety of payment options available to U.S. contractors.
You can use international banking partners, digital wallets, fintech services, and popular digital payment portals like PayPal or wise. You can also pay international contractors via bank transfer, check, international money order, or wire transfer.