Hiring independent contractors can come with a lot of benefits for your business. For one, their hours can be more flexible than regular employees. They can work for specific projects or set time periods, and you don’t need to continue paying them when they aren’t working. It’s also much easier to outsource things such as IT, bookkeeping or maintenance to an outside contractor rather than create a whole new department within your organization.
One of the biggest reasons why companies opt to hire an independent contractor instead of a bona fide employee is the paperwork, though. Terminating someone without a W-2 status is much simpler, and you don’t have to pay FICA taxes or unemployment taxes on independent contractors.
All in all, it can be a smart move for you in a business sense, but you need to do it right. Everything from creating a contract to independent contractor mileage reimbursement is a little different than normal employees.
What is an Independent Contractor?
An independent contractor is a person or entity contracted to perform work for or services to another entity. Essentially, you’ll know if someone is a contractor if you can only control or direct the result of the work but not how the work is done. If you hire a contractor to perform maintenance, you can ask them to fix a thermostat, but you can’t tell them what tools they should use.
Whether or not your contractor is actually an employee is very important to the IRS. In fact, the IRS considers a worker to be an employee unless you can prove otherwise. Employees have their income tax liability handled by their employers, can work across multiple projects, receive benefits and use company equipment. Contractors, on the other hand, work on a per-project basis, are not eligible for benefits, must file their own tax returns and often use their own tools.
Hiring Independent Contractors
When you’re hiring a contractor, the first thing you need to do is make sure you actually shouldn’t be hiring an employee. If you end up treating your new hire more like an employee, and the IRS suspects you of only trying to avoid paying taxes on them by calling them a contractor, you could be subject to fines and penalties. Once you’ve decided you need to hire an independent contractor, here’s what you need to know.
Do Your Homework
Just like when you check references, verify credentials and perform a background check for a prospective employee, you should do the same for a contractor. You should also check online reviews. Many independent contractors are organized as a business, and past customers may have shared their experiences online. You can also check with the Better Business Bureau to make sure no complaints have been filed against them.
For any independent contractor, you need to make sure to save their resume or professional credentials, both for your own protection and for verification during an audit. You’ll also need to write up and have your new contractor sign a contract detailing what you and them have both agreed to give the other. Even the most simple relationship should have a contract to ensure nobody can get away with not meeting their end of the deal.
Unlike employees, independent contractors need a W-9 instead of W-4. They serve essentially the same purpose, though, and they should be signed before any work actually begins.
Paying independent contractors is typically pretty simple. You can either pay by the hour or by the project. They are also responsible for paying their own income taxes and self-employment taxes, so you don’t need to worry about withholding any income taxes.
As an employer, you are required to track payments made to independent contractors and report them to the IRS. Beginning in the 2020 tax year, for each independent contractor you pay $600 or more during the year, you must report the total amount paid.
Independent Contractor Mileage Reimbursement
Independent contractor mileage reimbursement – and reimbursement in general – can be a complicated matter. Any money paid to a contractor is usually considered to be income, but there can be cases when it becomes necessary to reimburse contractors. The IRS has provided some leeway on what is okay to account for reimbursement for this reason. If there are additional driving requirements, for instance, this can call for mileage reimbursement outside of what a contractor is being paid to complete the agreed-upon job.
When you find yourself in a situation where you need to provide a mileage reimbursement for independent contractors, you still have to rely on their reporting. Hopefully, every independent contractor is already keeping track of business mileage, but many are likely still doing it the old fashioned way, with paper, pencil and odometer readings.
Simplify Independent Contractor Mileage Reimbursement
SureMileage is a modern mileage tracking and expense reimbursement solution developed by CompanyMileage. Rather than requiring someone to manually input odometer readings before and after each trip, our system calculates the distance between point A and point B to determine mileage. It’s ideal for anybody with your company who needs to be on the road to visit job sites or run errands, providing an easy-to-use, accurate solution for both employee and independent contractor mileage reimbursement.
After mileage expense reports are submitted – which takes just a few minutes for employees or contractors to complete – SureMileage automatically moves it through your approval workflow. While the final authorization for reimbursement is approved by the manager, all levels can be tailored to meet your needs and conform to your processes. Our platform also integrates with most accounting and payroll software solutions, so issuing reimbursements is fast and straightforward.
Whether you are trying to make sense of employee or independent contractor mileage reimbursement, there is no solution simpler than SureMileage. Request a demo with CompanyMileage today to get started.