Greenleaf Accounting

Virtual Bookkeeping & Accounting Services

(814) 450-0072
  • Email
  • LinkedIn
  • RSS
  • Twitter
  • Home
  • Services
  • About
  • Testimonials
  • Blog
  • Contact

Guidelines for Hiring Subcontractors

May 14, 2018 by Deb Howard Greenleaf

As your business grows, it might be time to start hiring help. You can do that by hiring employees or working with subcontractors. If you hire an employee, you have to deal with salaries, payroll taxes, and many other legal and HR related issues. If you hire a subcontractor, things are a bit simplified – as long as you follow the right guidelines. 

Since many small business owners prefer to avoid the tricky waters of payroll taxes, let’s talk about you can hire help in the form of subcontractors. 

Make Sure They Are Really Subcontractors and Not Employees

As I mentioned, employees are more complicated. You are responsible for withholding and paying the employment-related taxes (among other things). Per the IRS, your worker is only a subcontractor if he or she is responsible for keeping his or her own records and paying his or her own income and self-employment taxes. But there are three other factors to consider.

  1. Behavioral Control – If you control how the work is done (where they work, when they work, etc) then the worker might be considered an employee, not a subcontractor.
  2. Financial Control – If you direct and control economic aspects of the work (opportunity for profit/loss, how much they must invest in assets or pay in expenses, etc) then the worker might be considered an employee, not a subcontractor.
  3. Relationship – If you have a significant relationship with the worker (offering benefits, hiring them for a high number of hours, etc), then the worker might be considered an employee, not a subcontractor.

Cover Your Tax Bases

The first thing to consider is whether you’re working with someone in the United States or overseas. 

In the United States

Just because you don’t have to withhold and pay taxes for subcontractors, doesn’t mean there aren’t filing requirements. If you pay a subcontractor $600 or more in one year, you must report those payments on a 1099-MISC unless: 

  • You paid them through PayPal or with a credit card
  • You hired them through a service like Upwork or Fiverr or some other agency

If you do have to send a 1099, you’ll need to have your subcontractor fill out a W-9 form to gather information. Have them do it as soon as you hire them, and file it away so you have it handy when you send out 1099s the following year. The 1099 forms must be sent by January 31, so you won’t have much time to collect information if you forget!

Overseas

Don’t assume there are no filing requirements if you hire a foreign worker. No, you shouldn’t have to collect a W-9 and send a 1099, but some countries do require reporting. That’s why I highly recommend using some sort of service if you choose to hire subcontractors outside the US. There are legal and tax implications that can get tricky, and those services handle all that for you. 

Stay in Budget

Many small businesses hire subcontractors instead of employees to keep costs low, but the danger is projects can balloon out of control and before they know it,they’re paying more than they would’ve paid for an in-house employee. To make sure that doesn’t happen, have a contract in place that explicitly details things like:

  • The scope of work to be done
  • The timeline to be followed 
  • The cost of the work (can be a set amount, hourly rate, or combination of the two)
  • How the subcontractor will be paid (credit card, check, Paypal, etc)
  • The timeframe the subcontractor will be paid in (100% upfront, spaced out throughout the project, etc)
  • The terms if the contract is breached

Have a contract ready (ideally created by a lawyer), though some subcontractors may have their own contracts. Whoever’s contract you use, make sure you are both comfortable with the information because it a legally binding document. 

Hiring help can be a game changer in your business. Whether you’re looking to hire an assistant, a bookkeeper, or just a little help once in awhile, you need to be prepared to deal with the tax and legal implications. These guidelines are a great place to start, but if you have more questions reach out to your accountant or lawyer. 

Deb Howard Greenleaf
Deb Howard Greenleaf

Deb Howard Greenleaf, EA, CEO and Principal, of Greenleaf Accounting Services provides virtual accounting and bookkeeping services and specializes in financial management to consultants, coaches, solo professionals, and other small business owners across the US. Deb is an Enrolled Agent (EA)—an IRS-licensed tax professional—and specializes in small businesses and entrepreneurs filing Schedule C or as an LLC. As an Advanced Certified QuickBooks ProAdvisor, Deb spends her day in QuickBooks Online and specializes in providing QBO support.

Related posts:

Default ThumbnailDo You Use “Freelance Workers” In Your Biz? Watch Out! Default Thumbnail1099 Forms Due Soon! Understanding 1099-K versus 1099-MISC Forms by Greenleaf AccountingUnderstanding 1099-K versus 1099-MISC Forms Default ThumbnailTax Break for Hiring

Filed Under: 1099 Reporting, Best Practices, Small Biz Taxes Tagged With: 1099, contractors, hiring

Free 1099 Success Cheat Sheet

Want to be ready for 1099s at year end? Learn how with my 1099 cheat sheet.

Browse by Topic

  • 1099 Reporting
  • Best Practices
  • Bookkeeping
  • Greenleaf Accounting
  • New Business
  • Quotations
  • Small Biz Taxes

Recent Posts

5 Best Practices for Invoices That Get Paid Faster

We're excited to introduce a few new voices with the first in a series … [Read More...]

How to Pay yourself as an S-Corp

If your business is set up as an S-Corp (or an LLC with an … [Read More...]

Is an S-Corp Right for Your Business?

With all the recent tax shakeups, more and more small businesses are … [Read More...]

Estimated Quarterly Taxes Due Soon!

It's that time! The deadline to pay your fourth estimated tax payment … [Read More...]

Contact

(814) 450-0072

Free 1099 Success Cheat Sheet

Want to be ready for 1099s at year end?
Learn how with my 1099 cheat sheet.

Recent Posts

  • 5 Best Practices for Invoices That Get Paid Faster
  • How to Pay yourself as an S-Corp
  • Is an S-Corp Right for Your Business?
  • Estimated Quarterly Taxes Due Soon!
  • Budgeting for 2019

Reliable, Efficient and Precise

“Deb has handled my company’s invoicing and bookkeeping with impeccable attention to detail and service for several years. She is reliable, efficient and precise – remembering logistics, following through on details, and always smiling. I appreciate her help and value her expertise in handling my finances. Deb is the quintessential professional – I highly recommend her without hesitiaton.”

– Dr. Camille Preston, Owner,
AIM Leadership, LLC

Knows Her Stuff Inside & Out

“Deb is an amazing person, not only at what she does (in which she excels) but her personality is simply the best! She is always in clear control of her work; she knows her stuff inside and out; and she’s such a joy to work with and to count as a friend! I would highly recommend Deb to anyone who is looking for someone who is “above and beyond” the normal bookkeeper.”

– Vickie Turley, Chief Administrative Manager,
BossaNova Consulting Group, Inc.

© 2023 Greenleaf Accounting Services · Privacy Policy · Terms and Conditions