Stay on Target With Hired Guns

Posted on November 24, 2013 in Business Transactions

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The following 5 tips will help you avoid complications when hiring contractors.

You want to grow your business, but the thought of taking on employees–dealing with salaries, payroll taxes and personality issues–scares you more than the latest Friday the 13th movie. Happily, there’s a way to expand your company’s capabilities without bloating it with staff: Hire contractors.

Call them what you will: independent contractors, freelancers or outsourced staff. It all amounts to the same thing: Your work gets done without swelling your overhead. But there’s a fine line between employees and freelancers. To avoid complications with contractors, follow these five tips:

  1. Make sure your personnel are not employees in contractor clothing. The IRS carefully scrutinizes the use of independent freelancers, partly because companies have used them as a subterfuge to avoid paying employment taxes (You can bet the IRS wants you to pay as much in taxes as possible). The IRS will look to the degree of control you have over the worker. Do you dictate how, when and where the work will be done and by whom, using what method? If so, the worker is more likely to be considered an employee.For example, if you hire “Jemma” as an independent contractor to come to your office and answer your telephones with your company name from 9 a.m. to 5 p.m., the IRS is likely to consider Jemma an employee, even if you have a written agreement calling her an independent contractor.
  2. Ask for business certificates. One of the ways to avoid getting caught in the employee “net” is to hire business entities as your contractors. This doesn’t mean outsourcing to a behemoth corporation–there are plenty of single-owner businesses that might meet your needs. Working with someone doing business as an entity (instead of as a sole proprietor) provides one level of protection against confusion that the freelancer is an employee. Generally, you don’t have to provide a corporation (or LLC) with a 1099 form for services rendered, which creates an important distinction.
  3. Own what’s created for you. Ownership of creative work can become a thorny issue. The general rule is that the person who creates the item–be it a logo design, website, marketing piece or book–owns the item and is entitled to control how it is used. As the business owner commissioning the work, you want to be sure that ownership is transferred to you. This can be done, but it needs to be in writing and carefully worded.
  4. Don’t accept OPS (Other People’s Stuff). Even the biblical Book of Ecclesiastes notes that “There is nothing new under the sun.” Much of what an independent contractor does for you may have been used with other clients (for example, a template format for a web design) or may reflect the contractor’s personal style. What you don’t want is to receive work product that is a direct rip-off or copy of what was done for other companies or includes their intellectual property or confidential information.You’ll want any contractor to promise–in writing–that materials provided to you will not infringe the rights of others, with penalties and procedures included if the contractor breaks the promise. Similarly, smart contractors will want you to promise that none of the materials you provide to them is tainted.
  5. Ensure there’s insurance. You know that you’re dealing with people on solid contractor footing when they have business insurance–specifically errors and omissions insurance (where applicable). Should you need to bring a lawsuit against your contractor, insurance ensures that there’s a deep pocket available to pay any damages you may have incurred and that your contractors are thinking seriously about protecting their own assets (and businesses) against risks. Without insurance, you could sue a contractor and get a judgment but not be able to collect if there isn’t enough money in the contractor’s bank account.

Contractors can be a great boon to your business if managed wisely. Put your agreements with them in writing, just as you would for any other significant services vendor. A little twist in the wording can make the difference between being protected and being caught naked. Make sure to have your agreements reviewed by an attorney before signing them. That way, when you work with a “gun for hire,” you have the right ammunition.

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