Hiring Freelancers? Here's What You Need to Know!

Businesses of all sizes have turned to hiring freelancers, also known as independent contractors, for a wide variety of tasks from graphic design to content creation to event management. Freelancers are a great way to get work accomplished without having to hire and pay for a full-time employee, generally making an independent contractor a cheaper way to go. In fact, according to a recent study, nearly 1 in 3 Americans complete freelance work, making this sector a huge part of the economy. 

However, as great as hiring a freelancer can be, it's important to make sure your company handles the paperwork and tax implications of freelance work correctly. Improper labels and mistakes on both the part of the freelancer and the company hiring a freelancer can lead to audits and potentially even penalties by the IRS. Heed these important tips to ensure your company properly classifies the person as a W-2 employee or an independent contractor:

Understand the Difference
A W-2 employee is a regular employee and according to the IRS, "generally, the company must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee." As for a freelancer, or a W-9 employee, companies generally do not have to account for these things. Thus, it is usually cheaper for a company to hire an independent contractor, but there are rules in place to make sure companies do not improperly mis-label a W-2 employee as an independent contractor. 

How to Tell
The biggest issue is the amount of control a As stated by the IRS, there are three major Common Law Rules that determine if an employee can be classified as a freelancer or independent contractor:

1. Behavioral: Is the company telling him or her when, when, and how to do the job? Or is the person working on their own accord to complete a specific work task? For instance, if the employee is working at home on a project at their own speed, they are more likely to be considered an independent contractor. 
2. Financial: Is the employee handling their own business aspects of the job? This includes things like who is paying for the tools and supplies, how the employee is getting reimbursed for business expenses, and if the person owns their own company who is contracted to do the work. Typically freelancers will own their own office or workspace, their own computer, and have a system in place for receiving payments. 
3. Type of Relationship: How is the relationship between the company and the employee structured? Are their benefits associated? Is there a written contract? Is the employee solely working for one business? Is the work done by the employee vital to the business and projected to occur on an ongoing basis? Answers to these questions will vary by case, but are an important determinant in deciding if an employee can be considered a freelancer. 

Each scenario must be determined on a case-by-case basis because these three rules can be different for each. 

Do it Right
It can be tempting to claim an employee is an independent contractor to save time and money, but there are big penalties for misclassifying a freelancer. These include: reimbursement for wages you should have been paying them all along and overtime if applicable, payment of back taxes, social security, and the like, and potentially even fines. It is best to classify an employee correctly from the beginning. 

Varies State By State
Some states may have their own unique set of independent contractor rules and regulations. Companies must be sure they remain within in the bounds of both the federal and state rules in regards to hiring freelancers. Colorado independent contractor rules can be found here. 

If you've read through this blog and are still not sure if your employee should be considered a W2 employee or an independent contractor, a business can fill out the SS-8 IRS Form, send it off, and have the government help decide the status.

Tally Services in Fort Collins, Colorado has a team of full-service bookkeeping and accounting experts that can help you navigate the complicated independent contractor rules and regulations to ensure the business is not at risk for misclassifying an employee. We'll help the business with payroll taxes including forms: W-9, W-2, 1099, 940, 941, as well as, any other implications of hiring a freelancer. Contact us today for more information.