Hiring reliable freelancers, also known as 1099 employees and independent contractors (ICs), is quickly becoming the new normal for many companies in a variety of industries. In fact, you've probably hired a freelancer or two in the past yourself — or at least considered it.
But in order to build a solid foundation with members of this growing workforce and utilize them to their full potential, your company must learn to onboard them properly.
This quick guide is designed to be a comprehensive overview of how 1099 employees differ from full-time employees and how to conduct the onboarding process effectively. Let's get started.
The Benefits of Hiring an Independent Contractor
So what's the difference between an independent contractor and a regular employee? And why might you want to hire one over the other? Though the distinction may seem trivial, it's very important that you classify each member of your workforce correctly. If you don't, you may face expensive fines.
The exact definition will vary depending on where your company is located, but, in general, an independent contractor is a self-employed person who provides specific services for your business in exchange for compensation — usually money, but company equity is a possible form of payment also.
Hiring this type of worker has a few potential benefits:
When hiring independent contractors, you are not required to pay for their office space, necessary tools, insurance or benefits packages. You only pay them for the work they do, which typically results in financial savings for your business.
By hiring a 1099 employee, your company has the flexibility to bring on specific people for specific projects. This will often give you the option to hire top-notch talent without the obligation to retain them long-term.
Employing an independent contractor allows for simpler administration. There's less initial paperwork to be filled out (we'll go over all the necessary documentation in a later section of this guide) and payroll is much easier because employers are not responsible for withholding payroll tax.
Hiring a freelancer may be the perfect solution for your business. But the IRS has really cracked down on the misclassification of workers over the past 10 years. It's important that your company accurately distinguishes which of your workers are full-time employees and which can be considered independent contractors.
Making the Distinction
The line between employee and independent contractor is often blurred. But by asking yourself the following questions, you should be able to get a good idea of which team members fall into each category.
Is this person working full-time for my company? If so, they're probably not eligible for a 1099 employee classification. Most freelancers typically work for multiple clients over the course of any given year. In order to retain their full-time services, you'll need to make them a full-fledged employee.
Do I provide extensive training and supervision over this person? If so, they'll need to be classified as an employee. Independent contractors rarely require any training from the companies they work with and are not told how or when to work on a project. Rather, they complete the agreed upon amount of work and turn it in.
Do I offer this person special benefits? Paid time off, health insurance and expense reimbursements are all signs of regular employment. If your company provides any of these benefits for the worker in question, they shouldn't be classified as a 1099 employee.
If after asking these questions you still feel you're unable to accurately classifying your workforce, fill out Form SS-8 and the IRS will determine your worker's status for you.
The Necessary Documentation
Once you've determined that a person can indeed be classified as an independent contractor, it's time to onboard them! Fortunately, the onboarding process for ICs is generally much simpler than onboarding full-time employees. But there are a few forms you'll still need them to fill out. Let's discuss those now.
A W-9 form must be issued to each individual freelancer you employ in order to verify their name, current address and TIN (tax identification number). It also confirms their eligibility to work in the U.S.
And while you won't need to send this form in to the IRS or any other government agency, you are required to have one on file for each independent contractor you employ. Getting these filled out at the beginning of your working relationship with new ICs will save you a lot of hassle down the road.
Note: For international contractors, form W-8BEN must be filled out in place of the W-9.
A Confidentiality Agreement
A confidentiality agreement, also known as a non-disclosure agreement, is a special contract made between two parties — in this case, your company and the 1099 employee you're hiring. These contracts outline confidential material, information and knowledge, and restrict signees from sharing it with any third party.
Your company may not have a need for confidentiality agreements, but if they are necessary, it's wise to get them signed during the onboarding process.
A Non-Compete Agreement
A non-compete agreement is another contract you may want new freelancers to sign before they begin working for your company. They ensure that the freelancer won't enter into competition with your company — either by starting their own business in the same or similar field or by working for a competitor. These agreements usually only last for a certain amount of time after employment ends.
Though a 1099 MISC form isn't technically part of the onboarding process, they are incredibly important and we wanted to quickly mention them here. Your company must issue one of these forms to every freelancer that was paid more than $600 in the previous calendar year for tax purposes. This document details the specific dollar amount each contractor earned while working for you.
There are a few deadlines associated with these forms:
January 31st: 1099 MISC forms must be sent to each contractor by the end of January. If the last day of the month happens to fall on a weekend, you have until the following Monday.
February 28th: A copy of each 1099 MISC form you issue must also be sent to the IRS by the end of February. Be sure to file these forms accurately and on time or you may face penalties.
Note, if you file your 1099s by mail, you'll also need to fill out Form 1096, which is a summary of all the 1099s your company has issued for the previous year.
Finally, you'll also want to keep detailed records of your interactions with freelancers. So during the onboarding process, we recommend creating a file to store your original contract specifying the scope of work, payment details and process, and who owns the work once it's completed; as well as any invoices they send you. We guarantee that proper organization will really come in handy down the road!
More Than Paperwork
Having new 1099 employees fill out the required paperwork is essential. But an effective onboarding process involves more than just forms and compliance measures. You also need to integrate these new team members into your company culture — especially if you hope to develop a long term relationship with them.
So how do you do this? We have a few ideas:
Who will this new freelancer be working with? Arrange for them to meet, either in person, by phone or through email, so they can begin to familiarize themselves with each other. If a new IC is to work effectively and efficiently, they need to know who they'll be reporting to and what exactly is expected of them.
Independent contractors can't do their work without access to the proper materials, information and software systems. So make sure each freelancer has the appropriate tools and permissions before they begin working for your company.
Develop Communications Channels
Even the most seasoned 1099 employees will have questions when they first begin working for your company. By developing clear and convenient communications channels, you'll give them the ability to ask these questions and get the answers they need in a timely manner.
This doesn't need to be complicated. A dedicated Slack channel is a great option, or any employee engagement software you may already be using. But even just providing them the appropriate email addresses will go a long way towards communication.
Hiring independent contractors can really supercharge your company and help aid its growth. But without a proper onboarding system, they can also get your business in hot water — both organizationally and financially.
For the absolute best onboarding experience, try Onboard for free. Our software solution is intuitive and powerful and makes onboarding anyone — independent contractor, full-time employee, etc. — a simple, streamlined process.
HR Cloud is a leading developer of HR software & HRMS solutions for small and medium size businesses that have high turnover. HR Cloud's Onboard is market leading technology for effective new hire onboarding and Workmates enables employee engagement simply and easily. Founded in 2012, our HRIS empowers teams to easily onboard new hires, manage employee data, create a company social network and support employee development.