The gig economy is transforming the way we do business. In 2020, there were 64.8 million freelancers in the United States alone, and by 2027, the numbers are projected to reach 86.5 million, accounting for 50.9% of the total workforce.

Lengthy onboarding of employees doesn’t make sense if your business lacks time and resources. Studies show that almost a third of small business owners work more than 50 hours a week, and 86% work on weekends. Thus, there is great value in the freelancer market—especially for startups.

Taking advantage of the gig economy requires a deeper understanding of how this industry works. As non-payroll freelancers are making up a larger share of the workforce, businesses need to develop efficient onboarding systems that cater to independent contractors.

In this article, we’ll examine the pros and cons of working with an independent contractor, what you need to know before hiring, how to find top talent, and navigating the onboarding process.

What are the Pros and Cons of Hiring Independent Contractors

Just like any other business relationship, there are many pros and cons to hiring an independent worker.  

The Pros of Hiring Independent Contractors

Save Money

Although independent contractors tend to make more per hour than regular staff, it actually costs a business extra money to hire and retain employees. That’s because they are responsible for benefits, equipment, office space, 401K, overtime, and more. You need to make required contributions and payments on behalf of your employees as well.

This includes fees like:

• Social Security and Medicare taxes (totals 7.65% of an employee’s compensation)

• Worker’s compensation insurance

• State unemployment tax

All of these expenses can easily increase payroll by 20-30%, so there’s a large amount of cost savings when hiring independent contractors. Especially since they are responsible for their own income tax.

Greater Flexibility

Working with an independent contractor gives employers more room in hiring or letting go of workers. This is especially advantageous for a company with fluctuating workloads or seasonal business. 

You can hire an IC for a specific project knowing that the worker will be gone, once the work is completed. There is no trauma, expenses, or legal trouble that can occur when firing or laying off staff. You also don’t need to take the extra time to train freelancers, who are usually experts in their niche.

Fewer Risks

Employees have a multitude of rights under federal and state laws and can bring forth legal claims against employers for violating these rights. This can include the right to minimum wage, protection from discrimination, the right to unionize, and sick leave.

The Department of Labor does not oversee ICs. They are their own, self-employed entity, and not subject to the same laws as employees. However, contractors still have rights, which is why a legally binding, written contract is necessary. Your right to fire them will depend on a mutual agreement.

The Cons of Hiring Independent Contractors

Just like there are two sides to every coin, there are some disadvantages to hiring a contractor, such as:

Less Control

When using an independent contractor, you cannot tell them when, where, or how to work. As a separate business entity, they make their own schedule. In fact, if you interfere too much in their work, you might make them look like an employee. This runs the risk of having your classification decision questioned by government agencies.

Uninsured Worker

Unlike an employee, if an independent contractor gets hurt on the job, they will not be covered by workers’ compensation insurance. In exchange for benefits, employees give up the right to sue their employer for damage. Since ICs do not have the same agreement, they are open to suing you for injuries.

Intellectual Property

You may not own the copyrights to work produced by a contractor. Unless there is a written agreement transferring ownership of intellectual property, the freelancer has rights to anything they produce. With an employee, if they create something on the job, the rights are owned by the business.

What Do You Need to Know Before Hiring Independent Contractors?

When hiring an independent contractor, here are a few things to keep in mind:

Clarity on the Project or Role

It’s important to have a thorough understanding of the role and what you’re asking for from an IC, before starting the hiring process. You must define the working relationship and explore questions like:

• Do they have to be local? Can they work remotely?

• Is this someone you can work with for multiple projects or a one-off?

• Is this someone with the potential to become a full-time employee?

Once you have a better understanding of the big “ask,” it’s time to write the job description.

Create a Job Posting

This will depend entirely on the project you need to be completed. If you’re at a loss, researching job descriptions for a full-time or part-time employee in the same role will give you a good kickstart. 

In your job description, be sure to include an enticing summary, as well as listing out the duties, responsibilities, and skills required for the job. 

Lastly, make sure to highlight the role is for an independent contractor and short-term, so all expectations are on the table. If you’re looking for a temp to hire, this should also be noted.

Understand Employee Classification

This is one of the most critical steps in the hiring process for independent contractors. That’s because, when a business has issues with misclassification, it can be heavily fined by the IRS. In some cases, the line between a contractor and an employee is blurry at best.

For example, if you hire an IT developer to set up your website. They leave when the project is completed and they are paid accordingly. That’s a pretty cut-and-dry instance of contract work. There’s no need for payroll taxes, unemployment insurance, or figuring out tax withholding.

However, you may hire a contractor to maintain customer service on a project for a span of six months. After that, they continue to come into the office and work on other projects. You may even ask them to set a schedule.

At this point, it’s time to start wondering if you are misclassifying this person. The more time someone spends in the office, over a longer period, the more likely you will have to reclassify them as an employee. Or, subsequently, draw up new contracts per project for tax purposes.

If you ever have questions, the IRS, the Fair Labor Standards Act, and the common law have all set forth provisions to help define the differences between an employee and an independent contractor. Although there is no single test, the IRS considers these factors for worker classifications:

• Behavioral control - Does the company control what the worker does?

• Financial control - Does they control the financial aspect of the worker’s job?

• Contractor relationship - Are there written contracts or employee benefits?

There are some ways you can also tell if your worker is a contractor, such as asking questions like:

• Does the new hire choose when and where the work is performed?

• Is the worker being hired for a short-term project?

• Does the worker use their own materials and tools to perform the job?

• Is the worker paid a flat fee or hourly? Do they send you an invoice?

If you answer yes to any of these questions, it’s likely you’ve hired an independent contractor.

Setup Legal Agreements

The most important step before hiring a contractor is to ensure there is a written contract for them to sign. This is called an independent contractor agreement and sets forth in writing your entire business relationship. 

The legal agreement should include the following clauses:

1. Description of Work - This establishes the scope of the project including the start date, project description, milestones, deadlines, payment rate, and schedule.

2. Terms of Payment - Is the rate hourly or fixed? Do you need to make a deposit upfront or pay afterward? This should also include any fee amounts for late payments and weekly time limits.

3. Intellectual Property - Who owns what when the project is done? In most cases, you’ll want a clause granting full rights and ownership for work produced, which is generally the case (except for software licenses).

4. Term and Termination - The right to terminate the contract if the relationship is not working.

5. Non-disclosure - Protects both parties and any confidential information that is exchanged, like client lists, financial data, and proprietary processes. This may also come as a separate document from the contractor agreement.

6. Indemnity - If something goes wrong, who is responsible? If one party breaches the contract, is there a type of reimbursement in place? This is the section where you want to make that clear.

Other clauses to consider:

• Changes and Revisions - If any changes can be included and how many rounds of revisions are allowed.

• Competitive Engagement - This communicates the exclusivity of the freelancer’s services.

• General Clauses - A catch-all for any additional items you or the contractor want to include.

Lastly, don’t forget to have all parties involved sign and date the document to make it a legally binding contract. It may be best to consult a lawyer if you’re unsure of how to draw up an independent contractor agreement.

Setup Tax Forms

When first starting out, the contractor will give you Form W9. This declares their independent contractor status and can be used to prepare informational returns to the IRS. It will include important data like the contractor’s taxpayer identification number (usually their social security number) and contact information.

If an independent contractor receives over $600 in a calendar year from a business, you must send Form 1099-NEC (this replaced Form 1099-MISC in 2020) and the contractor must report their own self-employment taxes. You can find a template for Form 1099-NEC here.

Decide on How to Pay

The final step is to create the contracts and figure out payment information. There are a variety of ways to pay independent contractors and it’s something both parties need to agree on. Common methods include:

• Wire Transfers - Bank wires are a safe way to pay independent contractors and are generally used for larger sums (due to high fees).

• ACH - The Automated Clearing House moves money domestically for a smaller fee than wires.

• Online Payments - These payment systems process debit and credit card payments. It’s one of the easiest and safest ways to pay.

• Online Marketplaces - Brands like Upwork secure payments for workers via direct deposit, wire payments, and PayPal.

Lumanu Payment System

Lumanu is another way to enhance the independent contractor payment experience and simplify the entire process. 

The online payment system is designed for companies of any size to handle the heavy lifting of hiring independent contractors, from onboarding and IRS forms to domestic payouts and international transactions. 

A business can gain access to instant working capital and integrate with existing accounting platforms, all while collaborating in a shared universal space.

How to Find and Hire Independent Contractors?

The internet is full of places you can search for workers, it simply depends on what you are looking for. Here are some ideas to get the ball rolling:

Freelance MarketPlaces

These are usually the best place to start because it makes your search easy. However, there are fees to use many of these services. Top online marketplaces for freelancers include:

• Upwork - They have a massive pool of international workers performing everything from legal to finance and management. Upwork is extra secure because they use an escrow payment that allows a business to authorize payments as milestones are met.

• Toptal - This is the best freelancer marketplace for tech. Toptal is geared toward custom-matching and vetting senior software engineers and clients for compelling tech projects.

• Guru - This platform requires a membership but offers a complimentary “work room” where a business can oversee progress, define milestones, and keep an open line of communication.

  
  

Job Boards

The top job boards for finding an independent contractor include:

• Indeed - This is one of the top job boards online and also functions as an aggregator and search engine.

• Google for Jobs - This is an embedded feature of the normal search engine. Entering terms like “jobs near me” will show you a curated list.

• ZipRecruiter - This job board allows employers to post jobs to hundreds of platforms, including ZipRecruiter itself.

Professional Social Media

The LinkedIn Services marketplace is a lesser-known region of the social media platform that functions more like an online marketplace. Take your projects from to-do to done, with popular services ranging from marketing to graphic design, accounting, and development. 

If you have a LinkedIn account, all you need to do is browse the site for providers. There is no job posting necessary.

Social Media

Searching the hashtags of popular social media platforms like Facebook, Instagram, and Twitter is one way to locate independent contractors. Another way is to visit groups for job seekers and make a group post with your information and job description.

Word-of-Mouth

Building relationships with independent contractors opens up your network to more. If you’ve hired a great writer and are looking for a web developer, ask the writer first. Chances are they may have worked on a project in the past and remember another contractor they can recommend.

How to Properly Onboard Independent Contractors?

When onboarding independent contractors, it’s best to work out a step-by-step process you follow each time. Here is an outline for inspiration:

1. Discuss the Contract - Go over the general terms, indemnity, non-disclosure agreements, and intellectual property.

2. Define Key Deliverables - This includes milestones and deadlines. Discuss expectations and the meaning of the work.

3. Agree on Payment Terms - Some international contractors operate at different timeframes. It’s best to work out payment methods (wire, ACH, Lumanu), billing cycles (30,60,90 days), and everything else related to payment before moving forward.

4. Establish Communication - Determine the method of and how often you will communicate. (i.e. email, once a week).

5. Collect Tax Forms - Make sure it includes data on all parties including their tax ID number and your employer identification number.

6. Sign and Date - Ensure all parties sign and date the contract.

7. Request Permissions - If the contractor needs access to IT platforms or equipment, they will need that granted during onboarding as well.

Any tools or systems entrusted to the independent contractor should also be signed for in a separate document to protect your assets.

Final Thoughts: Hiring Independent Contractors

Independent contractors will help a business save money, provide a greater level of flexibility, and come with fewer risks. However, you have less control over the worker, they are uninsured, and may take ownership of intellectual property. Therefore, it’s important to thoroughly understand the independent contractor hiring process before moving forward.

Employee classification and your contract are the most important factors in the hiring process. Onboarding and the tax process can be simplified with an automated solution like Lumanu. This keeps you up to date on all contractor payments, strengthens freelancer relationships, and gives you a competitive edge over other brands.

Before Lumanu, the Co-Founders at 456 Growth worked at agencies with outdated and inefficient payment processes. Teams relied on paper checks as their go-to, which kept them from growing their talent roster. 

Today, 456 Growth uses Lumanu to pay creators, agencies, and talent managers across their businesses. This allowed them to scale their monthly transactions by 67%.

Want to get started onboarding your independent contractors today? Schedule a demo with Lumanu