Paperwork Needed For Independent Contractors
So, if you’ve decided that you’re ready to hire an independent contractor, let’s talk about the paperwork that you need to gather from the contractor upfront.
First, there needs to be some sort of written contract that is signed by both parties. This can be a formal contract, a proposal, or anything else that is in written form.
The contract protects both of you in the event of a dispute. Some issues that need to be addressed in this contract include:
- The scope of work, including when the job is to be done, and deadlines
- Amounts and timing of payments, when payments are due, what happens if payments are not made
- Who will own the work- the contractor or the hiring company? The most important clause in this contract should be a statement that this person is an independent contractor, not an employee. It's essential that both you and the independent contractor understand the type of relationship and the fact that they are responsible for paying their own income taxes and Social Security/Medicare taxes.
Depending on the type of work being done and the specific needs of your business, you may want to get other agreements. These sub-agreements (sometimes clauses in a contract) are called restrictive covenants because they restrict what the independent contractor can do.
A confidentiality agreement (sometimes called a non-disclosure agreement) requires the contractor to keep your business trade secrets confidential and not share them with others unless it's agreed to.
A non-compete agreement sets out the restrictions on the contract worker from leaving your company and taking your customers or clients to another company. It is usually written to restrict someone's actions for specific activities, for a specific time period, and within a particular area.
A non-solicitation agreement keeps employees from working for the competition, and it can also be used to keep an independent contractor from stealing your employees or customers.
You should make sure that the contractor provides you with a completed Form W-9 before you make any payment to the worker.
When they submit the completed form to you, it is crucial that you review it to confirm that it has been completed properly. The most common mistake is the failure to complete Line 3 of the form correctly. Every contractor MUST indicate how they are taxed by checking a box. If they do not check a box on Line 3, the form is not completed properly, and you should request that your vendor correct the W-9.
Make sure that you keep a copy of any W-9 that you receive.
If Walton CPA PC prepares your 1099’s for you, we recommend that you forward any new Form W-9’s to us as soon as possible. Alternatively, you may consider entering the vendor information in your accounting software yourself.
Do not wait until yearend to request W-9’s from your vendors. You should always request and receive a Form W-9 prior to paying your contractor.
Here’s an example of a very common situation and how to handle it.
A vendor does work for you. You ask him to complete his Form W-9 in order to get paid but he says he doesn’t have that information available. We recommend that you provide him with 2 options:
- You will hold his payment until he provides you with a Form W-9
- You can pay him now but you will have to withhold a portion of the payment as backup withholding which you will have to send to the IRS.
Proof Of Insurance
Your independent contractor may need to provide that they carry different types of insurance coverage such as:
General Liability Insurance
Your independent contractor should carry general liability insurance which would cover any damages or injuries that they may cause while working on your project. It provides you with a policy to collect from if the contractor’s work causes you harm.
Errors & Omissions Insurance
Errors & Omissions insurance protects you against your contractor’s professional error or mistakes.
Worker’s Compensation Insurance
Worker’s compensation insurance protects you if the contractor or the contractor’s employees get hurt at your job site.
Auto insurance might be necessary if the contractor uses vehicles to complete your project and is involved in an accident.
For all of these agreements, the key is whether you can take the person to court if they violate the terms of the agreement.
If you have any questions about the paperwork you need to have on hand for independent contractors, please reach out to our office.