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A Step-by-Step Guide to Hiring 1099 Contractors For Your Small Business

A small business owner’s guide to finding, hiring, onboarding, and managing 1099 contractors
Business 101May 02, 2024

Looking to get the job done without the hassle and cost of a full-time employee? 1099 contractors, also known as freelancers or independent contractors, are a great solution, especially when compared to the cost of hiring full-time employees. But finding, hiring, onboarding, and managing them can be a headache if you don't know what you're doing or you’re doing it for the first time.

There’s been a huge shift in the workforce from traditional employees to independent contractors, so you’d be in good company. Even the biggest players in the game are making heavy use of freelancers and contractors these days. In fact, according to DemandSage, Google employs more freelancers than it does permanent workers.

But how exactly do you find a contractor? What does hiring them actually look like? Are there tax obligations to paying someone to support your small business? We’ll unpack all the answers for you to keep you out of the Google rabbit hole.

How does a 1099 contractor compare to a W2 employee?

Before we dive in, what exactly is an independent contractor? A 1099 contractor, also known as a freelancer or independent contractor, is a worker who performs a job for a business but isn't technically an employee of that business. They are different from traditional W-2 employees

Here are a few key differences between 1099 contractors and W2 employees you need to know:

What's the difference between independent 1099 contractors and employees

The main benefits of using contractors are flexibility, cost savings, and access to specialized skills. This can be a win-win situation for businesses because hiring a contractor who produces better quality work may be more affordable. 

The main disadvantage is that the contractor might not know how your business operates, so there can be additional onboarding time. Another potential disadvantage is your reduced control over how and when a contractor works—they may not be operating on the same schedule as you. 

What are the benefits of hiring 1099 contractors?

So why would you hire an independent contractor to help grow your business? Some of the biggest benefits of hiring contractors are flexibility, scalability, cost savings, and the ability to meet specific needs.

1. Flexibility and scalability

Using 1099 contractors allows businesses to scale almost on demand as needed. In addition, since the contractors are often hired for either a single project or a series of projects, you don't need to worry about continuing expenses once the short-term need passes, which can be a big advantage.  

2. Cost savings and tax advantages

Let’s face it: Managing cash flow when you have an irregular income can be tricky for small b business owners. Not having to provide benefits can be a significant cost-saving for businesses. Contractors and freelancers also typically require less training than W-2 employees since they don't need training on how you operate. 

You also don’t pay the employer portion of the contractor’s Social Security and Medicare taxes. Instead, the contractor is responsible for paying both their part and the employer’s portion of these taxes as self-employment tax

3. Access to specialized skills

Freelancers and other 1099 contractors are often highly specialized. And they can afford to be since they typically hop from project to project and are hired for their specific skill set. No matter how specific your need is, there's probably a contractor out there that can meet it.

This is a huge win for the businesses hiring these contractors. Their specialization means that they’re usually very good at what they do, which is a weight off your shoulders. Since they’re hired for a particular job, they don’t need to worry about being able to perform the ancillary tasks that a regular employee might. 

A step-by-step guide to finding 1099 contractors

Now that you know why you should consider hiring contractors, you might wonder how to find them! This can be intimidating if you've never done it before, so here are a few things to remember.

Step 1: Clearly define your needs for the right fit

Having a clear idea of what job you want done is important for several reasons:

  • Minimize back-and-forth communication: Contractors often have multiple offers at once. By presenting a clear and concise description, you eliminate the need for lengthy discussions, making your company all the more enticing.

  • Ensure the right fit: Clearly defining what you’re looking for ensures that you hire the right person for the job. Contractors can have varied skill sets and expertise, even in the same field, which is important to get the right fit.

  • Avoid future headaches: Setting clear expectations upfront will help avoid potential problems with timing, payment, and scope of work. These are three areas where you (and the contractor)  might experience the most friction, so laying them out in advance can save a lot of headaches down the road.

When describing the job or project, make sure to include the following details: 

  • A comprehensive description of the work you want to be completed

  • The timeframe for doing it

  • Whether remote work is feasible for the contractor

  • The rate you’re willing to pay for the job

Remember that some contractors may have different rates, availability, or methods. Sometimes it can be beneficial to negotiate if there’s a particular contractor you’d like to work with—the experience or expertise might make it worthwhile to pay a bit more, for example.

Step 2: Look for freelancers and 1099 contractors in the right places 

The most common ways to find contractors for your business are through referrals and online platforms, such as social media and job boards. 

  • Word of mouth and referrals: Simple referrals are often the best source of good contractors. Chances are, you have some business contacts that have successfully used contractors before—ask for referrals! Incidentally, this is also typically the best source of new work for the contractors, as well.

  • Social media: Social media can be a fantastic source for finding contractors—especially Twitter and LinkedIn. If you post that you need a contractor, freelancers will find you. There are also some freelancers that go around the various social media sites and aggregate job postings for weekly emails, so your tweet may have more reach than you think.

  • Freelancing platforms: Platforms like Upwork and Fiverr have become fairly popular over the last several years. While these sites offer access to a wide talent pool, keep in mind that fierce competition may lead to pricing pressures. Remember the adage "You get what you pay for," but don't overlook the opportunity for great work at a reasonable rate.

  • Online job boards: Specialized job boards like ProBlogger and Superpath cater to specific niches, such as copywriting and content marketing. These differ from freelance platforms in that they only connect the company with the contractor—sites like Fiverr are more involved in the relationship. 

Step 3: Vet potential contractors thoroughly to ensure a good experience  

As you sort through potential contractors for your business, it becomes essential to vet them properly. Here are some things to do before you sign the dotted line:

  • Review their website and social media profiles: Most freelancers will have an online presence, typically in the form of a website and social profiles. Looking over these can give you an idea of whether the contractor knows their stuff. Twitter and LinkedIn tend to be the most popular platforms for freelancers.

  • Review the contractor’s portfolio: Many, if not most, contractors and freelancers will have a portfolio of past work they can show you. Typically, this will be hosted on their website, but if not, feel free to request examples. In many ways, this is the equivalent of the contractor’s resume and serves to highlight past work and (ideally) the results of that work. 

  • Ask for testimonials or references: One of the best ways to vet contractors is to check testimonials from past clients. These give you an idea of the type of work they do and (perhaps most importantly) how they are to work with. Another reason referrals are so great is that the contractor has been pre-vetted by the person referring them.

Step 4: Send a contract and start onboarding

Once you’ve found the right contractor, your last step is to get them onboarded and ready to start. This typically involves drawing up a contract, collecting W-9 forms, and possibly adding them to any project management systems you use.

Draw up and sign a contract

Since contractors aren't employees of your business, they aren't covered by the legal agreements you likely use for full-time employees. Therefore, it's essential to draw up contracts covering any potential legal issues. 

While the exact structure and scope of these contracts will vary from business to business—and you should definitely consult a legal professional—we can give you some idea of what to include:

  • Payment rate and terms

  • Length of engagement, if applicable

  • Who owns the rights to the completed work

  • Any confidentiality or non-compete clauses that are needed

  • A termination clause that covers the grounds upon which either party can terminate the agreement

Have the contractor fill out a W-9 form

If you pay a contractor more than $600 in a calendar year, you’ll need to file a 1099-NEC form with the IRS to report your payments to contractors. A W-9 form collects the contractor’s tax identification number (TIN) so you can do this properly. As such, it’s important to do this before sending any payments, but the simplest time is during the onboarding process.

Add the contractor to your systems 

Onboarding is a great time to establish the contractor in any software systems you use for finances and project management. For example, give them access to important files or have them set up an account with a payment processor. Doing this now ensures they can dive right into the work when it comes.

How to manage 1099 contractors

Since contractors aren't employees of your business and often work remotely or on a different schedule, managing them can be a bit challenging at times. In an ideal situation, you won't need to do much (or any) management—the contractor should be able to handle the assigned work and keep you in the loop along the way. But, of course, this isn't always the case.

Communicate well 

The main way to manage contractors, as with regular employees, is through strong communication. This is especially important with contractors because they don't work full-time for your business—in other words, they may not know all the methods, procedures, and other nuances of how you operate and what you expect.

One of the best ways to manage contractors, primarily if you work with multiple at once, is with a project management tool like Trello or Notion. This helps keep everyone on the same page and provides a convenient way to share files and other important materials.

Set clear and reasonable expectations

When discussing clarity in the job description, setting clear expectations is key. It reduces unnecessary back-and-forth communication and eliminates many management headaches that can crop up when there are too many unknowns. 

Follow some best practices for tax reporting and payments

When dealing with 1099 contractors, the financial aspect can be intimidating—mainly if you've never worked with a contractor. Here are some tips to ensure a smooth process:

  • Request a formal invoice: To facilitate accurate records and proper payments, have the contractor submit an actual invoice to your business. Don’t rely on “verbal” agreements to determine fees.

  • Keep accurate records: Along the same lines, make sure you perform thorough, accurate bookkeeping and keep records of all financials. For example, save copies of invoices and record the dates and amounts of payments.If you’re using Found, we’ll automatically categorize these payments as contractor payments.

  • Pay on time: Finally, make your payments when you say you will. You know how it feels to not get paid on time. Don’t do that to the people you hire. This can help foster goodwill with the contractor and build a more respectful, productive relationship in the future.

Legal considerations for working with 1099 contractors

Aside from having a solid contract, proper classification is the most important legal consideration when working with contractors. In other words, it's crucial to report contractors correctly to the IRS and properly classify contractors as contractors and employees as employees since you must provide benefits for the latter.

The rules around what constitutes a contractor have been debated in recent years. Generally, the Department of Labor considers how much control the employer has over the worker and the worker's opportunity for profit or loss. However, its most recent ruling, which was issued on January 11, 2024, and took effect on March 11, 2024, returned things to the previous status quo. It states that you should use the following six factors to make the employment determination:

  • Worker’s opportunity for profit or loss that depends on their skill

  • Investments in the business made by the worker and employer

  • Degree of permanence to the relationship between the two parties

  • Nature and degree of control the employer has over the worker

  • Extent to which the worker’s job is integral to the employer’s business

  • Whether the worker shows initiative and uses specialized skills to do their work

Simplify your 1099 contractor management with Found

Working with contractors is a fantastic way to reduce costs and boost productivity in your business. Finding, hiring, and managing great contractors and freelancers can take time and know-how but is worth the investment.

When it comes to managing the financial aspects of dealing with contractors, a tool like Found can be a huge help. Our automated accounting and tax tools help you focus on what matters—finding great contractors to do great work. Try Found for free today!

FAQs about hiring contractors

What paperwork do I need to hire a 1099 contractor?

When hiring a 1099 contractor, the main form you'll need is a W-9 form, which collects important information from the contractor, such as their name, address, and Taxpayer Identification Number (TIN). If you pay the contractor more than $600 in a calendar year, you’ll also use this form to file a 1099-NEC form with the IRS. It's generally best practice to have the contractor fill out a W-9 before you send any payments their way, so it’s one less thing to worry about come tax time.

In addition to tax forms, it’s also helpful to have an independent contractor agreement that outlines the scope of the freelancer’s work, timeframes, and how and when they’ll get paid. It keeps both sides safe in the event of any disagreements. 

Is it better to hire an employee or 1099 contractor?

The answer depends on a few things, like what you need and your financial situation. Hiring 1099 contractors offers several advantages, such as flexibility and specialized skills on an as-needed basis. And, you typically don't have to provide benefits or pay employment taxes, helping keep your costs down.

On the flip side, employees provide stability, are more ingrained in your company culture, and you have more control over their schedule and work. But this comes with added costs and obligations. Hiring 1099 contractors is often a good way to test bringing others into your business. 

Is hiring a 1099 contractor a tax write-off?

You can typically write off payments to 1099 contractors as business expenses, as long as the work is directly related to your business operations. For example, if you’re a personal trainer, you might hire a freelance social media specialist to help with creating content to build your online presence. However, it's important to classify the contractor correctly and keep a record of all payments made to contractors. If you pay a contractor more than $600 in a year, you're required to issue them a Form 1099-NEC. Report these expenses on Schedule C of your tax return under the 'Contract Labor' section.

Disclaimer: The information on this website is not intended to provide, and should not be relied on, for tax advice.

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