Bootstrap

Let’s take a look at a very common practice in the world of small business - the use of independent contractors.

Many times, we small business owners need a little help to get our work done. So, we engage the services of an expert to help us. For instance, we used a couple of designers to help create the look and feel of the Bootstrap site. While this is definitely a lot easier than hiring an employee to do the work, there are still a number of complexities of which you should be aware.

First, make sure the person you use really does qualify as an independent contractor and is not an employee. See the IRS guide for more help.

Next, it’s a good idea, especially in the world of professional services, to use independent contractor agreements in addition to statements of work or other contracts. In addition to helping clarify the lack of an employer/employee relationship, it also helps to ensure that you own the rights to what the contractor produces for you. Odds are you’ve had to sign one yourself, but you can also find examples on Scribd and Docstoc.

Once you’ve agreed to use a contractor, you should get them to fill out form W9. This gives you the info you’ll need for your end of year reporting (more on that to come.)

Many states require that you report the “hiring” of independent contractors - so check to see if and where to submit to your state.

When you do pay contractors, make sure you track who you’ve paid and how much. Why? Because, for each person you pay more than $600 in a calendar year, you need to send both them and the IRS a copy of Form 1099MISC. You will need to enter the total amount paid in Box 7. With Bootstrap, we make this very simple - just use the “Contractors and freelancers” category for any payments to contractors throughout the year. We will be adding a new 1099 report that will list the contractors you’ve paid and the total for the year.

The fun really starts at the end of the year (or, to be technically correct, the beginning of the next year.) You need to send a copy to each contractor by January 31. You also need to file a copy for each contractor with the IRS by February 28 (or March 31 if filed electronically.) If you are going to file the paper copy with the IRS, you better make sure to get the official forms (the ones with the red ink,) either from the IRS or at most office supply stores. Why? Because the special forms are machine readable; printed versions (even with a color laser) are not.

So why is it important to file 1099s? I mean, what about paying folks under the table? Well, aside from being shady, the fact is, if you don’t file the 1099s with the government, you can’t deduct those payents. In this case, it really does pay to do the right thing:-)