- Employee vs. Subcontractor
- IRS Guidelines
- Massachusetts Guidelines
- Working with Contractors
- Resources and Links
Employee vs. Subcontractor:
Working with Independent Contractors
Protect Yourself with a Detailed Paper Trail
Ask for a written contract.
At a minimum, the contract should include the contractor's business name and address, and describe the services they are providing and what it will cost.Get a completed W-9 form from the subcontractor
(I usually ask for one when I receive their first bill or accept a contract, and don’t send a payment until the form’s been returned). This will include their social security number or employer identification number and mailing address. You will need this information to file a 1099 at the end of the year. Don't do this over the phone; get a signed form. You can get one from the IRS website or download one here.Ask for a certificate of insurance.
Sole proprietors without employees may not have workers comp insurance. However, many contractors will have their own liability insurance, which will help establish they have their own business, and may save you money on both your worker's compensation and general liability audits (as well as protecting you if they cause injury or damage while performing the work). Ask for certificates of insurance with the contract or before sending out your first payment. The certificates should come directly from their insurance company, list your business as certificate holder and include their business name, policy numbers, coverage limits, and policy expiration dates. If you continue to work with someone past the date their policies expire, get updated certificates.Ask for business cards
or other materials showing the independent contractor markets to the general public. You might also print their website’s home page or make a copy of their yellow pages ad. Save these materials with the contract in case you need them for an audit, since these will help establish that the subcontractor has their own business and markets to the general public.Get invoices for all work,
especially if there isn't a flat-fee contract. Invoices should include the contractor's business name and address.Request invoices which separate time and materials.
In the case where an independent contractor is providing materials as well as services, ask them to separate this on their invoices, even if the total cost is based on a single flat fee. If you do have to cover them under your own workers comp policy, additional premiums will only apply to labor, not materials.Make all payments to the company name.
A sole proprietor may be doing business under their own name, but if there is a separate business name, make the checks out to that name. If the name includes ‘Inc.’ ‘LLC’ or anything else indicating it is NOT an individual, make sure that is included in the name you put on the check.Issue a 1099 at the end of the year if one is required.
Although the 2012 expanded reporting requirements were repealed, you are still required to issue a 1099 for any services of $600 or more purchased from any unincorporated business or individual, as well as certain payments made to corporations. See the instructions for form 1099 at the IRS website or download a copy here.Despite following the guidelines and creating a sufficient paper trail, you may still run into problems with your workers' compensation insurance. Insurance companies usually require you to cover anyone you paid who doesn’t have their own insurance, even if they are clearly an independent contractor. So again, it is very important to have invoices which separate materials from labor!
As of 11/2003, Massachusetts independent contractors and sole proprietors are able to insure themselves and make claims against their own workers' comp policies; sole proprietors no longer have to be incorporated and paid through payroll to get their own insurance. However, these policies can be quite expensive and are not required, so many individuals won't have them.
Factor in the Expense to Cover the Contractor Under Your Own Insurance
If someone doesn't have their own coverage, you should factor in the expense of covering them yourself. Although for clerical-type work (data entry, graphic or web design, etc.) the cost is nominal, it can be extremely expensive for roofers, carpenters, etc. who are more at risk for accident or more likely to cause property or other damage. As much as 20-30% of whatever you paid them could be added to your insurance premiums at audit. You should check with your insurance agent on the cost before entering into an agreement with someone in a high-risk classification who doesn't have their own insurance, and keep those additional costs in mind when comparing quotes for work. Although two quotes may look the same, the one from the person with their own insurance is going to be cheaper when you factor in the cost to cover someone else on your own workers' compensation policy. You can look up Massachusetts worker's compensation rates here.
Even if someone has their own coverage, make sure your contract specifies that they must also cover all THEIR workers and/or provide proof of coverage for any subcontractors they use on your job. Otherwise you may find yourself having to cover an accident or injury caused by one of their workers, even if you never directly contracted with or paid that person yourself.
Next: Resources and Links
