Making sure that your employees get paid correctly and on time each pay period can be challenging, but managing payroll becomes even more complicated if your team includes both salaried employees and independent contractors. Hiring independent contractors for certain types of projects can have several benefits for your company, to be sure. It's important to understand how the two classifications differ, though — and what these differences mean for your relationship with your independent contractors.
This guide will go over some of the most important differences between independent contractors and employees, points to consider when paying independent contractors, and how outsourcing payroll to a third-party provider can smooth the process.
Although independent contractors and employees can perform similar types of work, the two classifications are quite different as far as your company's tax and payroll responsibilities. Independent contractors have much more control over their own work than employees do, for example, which also impacts how they are paid.
Here’s what you need to know:
For the most part, you are in charge of your employees' work schedules. You set the hours that employees work and determine what they are expected to accomplish within a given time frame. Although they might have a little more flexibility right now if some or all of your employees are working from home, you are likely still setting up deadlines, meetings, and other company policies that you expect your employees to adhere to. Independent contractors, however, control what time they work and how much they work, and you'll need to make your project fit the schedule they want instead of the other way around.
Independent contractors also have the final say as far as which jobs they accept, rather than being told exactly what they need to do. Independent contractors are considered self-employed, as they work more for themselves than directly for you. Although you can provide guidelines and deadlines for an independent contractor to follow, he or she is the one who ultimately decides whether to accept a job or not after reviewing this information.
Most companies typically pay employees on a set schedule — such as every week, two weeks, or month — but this procedure does not apply to independent contractors. Although you and your contractor can agree to divide payments over time for especially large and time-consuming projects, you will usually pay them the full amount of the project when it is finished instead.
Employees and independent contractors have different tax requirements, and employers need to be sure to provide the correct paperwork for each worker and pay the correct amount. You will need to replace the typical W-2 and W-4 forms that you are used to using for your employees with W-9 and 1099 forms for independent contractors.
You are not required to withhold taxes from independent contractors as you do from employees, as managing and paying taxes is the contractor's responsibility. You will simply need to inform the Internal Revenue Service (IRS) that you paid a particular contractor at least $600 within a given year — which is done by submitting the 1099 form — rather than handling his or her taxes.
Keeping track of company payroll responsibilities is a must because the requirements for paying employees and independent contractors are quite different. Not classifying and paying your workers correctly can result in significant tax penalties.
Here are a few rules to keep in mind:
Regular employees are required to receive extra overtime pay, typically time and a half for full-time employees that work more than 40 hours per week. Because independent contractors set their own schedules and work as much or as little as they want, you are not responsible for compensating more for extra time if they choose to work more hours than average.
Similarly, employers are required to follow federal and state minimum wage guidelines when determining employee salaries. This requirement also does not apply to independent contractors because independent contractors generally are not paid by the hour. Instead, companies typically pay independent contractors a lump sum for each project when it is completed, regardless of how long he or she takes to complete it.
Lump sum payments are one major reason why companies need to simply pay independent contractors the full amount, rather than trying to determine specific tax amounts for each individual project. You should not withhold funds from an independent contractor as you do from an employee. He or she will then compile income from all projects in a given year to determine tax needs.
Managing payroll correctly can be challenging, especially when your company is paying more than one type of worker. Having the right payroll specialist to help you manage that process can make a huge difference, and that might mean it’s time to work with a third-party payroll provider.
Managing your payroll in house efficiently often requires hiring an extra full-time employee, especially if you need to keep track of paying both independent contractors and employees, which may not fit into your company's budget. Fortunately, you don't need to keep track of this complex information for each worker yourself.
Outsourcing your payroll to a third-party company service provider allows your company to have experts manage your payroll for you. This option has a wide variety of benefits over in-house payroll for both large companies and small businesses, such as:
At Ignite HCM, we know that keeping track of how your obligations differ when working with independent contractors can be challenging. We are here to help you efficiently process payroll and a variety of other HR concerns to keep your workers happy and your company running smoothly.
Contact Ignite HCM today to speak with an expert about any questions you have about how we can help you correctly manage independent contractor payroll.