So I run a website as a sole-proprietor out of California, but am looking to bring someone on as a contractor to help out.
But I have no clue with how to do that, or even where to start. Does anyone here have experience with this?
It can get complicated, but the basics have been the same for decades.
If they are set up only to pay W-2 (wage) taxes, you have to go through most of the employee steps, including withholding. If they are set up to pay Sched C self-employment taxes, you can pay them directly and issue a 1099 to record the payment to the IRS. That’s the gist; it gets more and more complicated the higher and more regular the payments get. If you’re not talking about very much money, 1099 contractor rules should be easy to find and interpret.
The rest is up to writing a contract or agreement both of you can live with.
Are you talking about how to find the right person, or the bookkeeping mechanics of paying them?
If the latter, I would add to what Amateur B said–if the contractor is herself incorporated, you can just write checks to her company the way you write them to any business, no IRS paperwork required.
However, I do suggest you consult an accountant. Bookkeeping, taxes, and payroll can be done by you, but they can be a pain.
You also might want to be incorporated properly instead of operating as a sole proprietorship if you’re hiring someone. You want to talk to a CA CPA too, as there are state and even locality-specific twists to running a business.
Finally, depending what your insurance situation is, you should look into what the ACA rules are and if it might benefit you to offer health insurance–there could be subsidies that will help you as well as the contractor/employee. Again, for that you should consult an accountant and/or insurance broker.
I think you’ll find that reputable CPAs and brokers will be happy to talk to you without charge in the hopes of securing your business.
Glad your business is doing well!
Thanks for the replies so far. I’m on my phone so can’t do a full reply yet, but wanted to answer the question about what this is about. I already know who I want to hire so this is purely about process and bookkeeping of hiring someone.
Now I could be mistaken, but it sounds like you guys are talking about hiring an employee, but I think km more interested in hiring him as a contracter if I can? This person is not incorporated, to answer another earlier question. I’ll be looking to pay him 35k a year, and he’s in an entirely different state and will be working from home, if any of that matters.
He’s working at his own location, on his own time, using his own computer, on his own schedule? All you do is ask him to complete a specific task, and his responsibility is to deliver the work product, not follow specific instructions and supervision from you?
If so, you can treat him as a contractor, which is much simpler than hiring an employee, if you don’t yet have any employees. Your basic responsibilty is to send a 1099 in January; if you use Turbo Tax to figure your own taxes, they make it easy to generate and file 1099s while you’re at it. The amount you send him goes on your schedule C as a business expense.
If your business has any kind of liability insurance coverage, you may want to make sure he has insurance of his own, and lists you as an additional insured.
IANA tax accountant, but I am self employed and have used independent contractors in my work.
Our accountant told us the basic–very basic–rule of thumb is the degree of control you have (or expect to have) over the person’s working hours. You pay them on a project basis and have no idea if they’re working on just yours or three people’s projects simultaneously? Sounds like a 1099. You have them ostensibly working full(ish) time and for an indefinite period of time? More like an employee, even if you don’t think you control them per se.
These, of course, are very loose rules of thumb.
Once you get a sense of things from the Dope and elsewhere, write up/prepare your questions and sit down with an accountant to discuss which way to go—making the wrong mistake can be pretty costly, potentially much more than an hour sit-down with a professional.
They’ll know how to distinguish between a paid worker and freelancer from a tax perspective, not a layperson’s understanding. Not that there aren’t easy cases, that you’ll necessarily get it wrong, or that it’s as important as having a lawyer for corporate matters (though it’s close). Just that there are a good number of nuances out there for it to be worth the couple hundred bucks of accountant fees.
Plus, if your business continues to grow, it’ll only be a matter of time before you need an accountant outright. This is a good time to get to know some so you’re not picking while also struggling to manage your business.
Final note, at least worth bolding: ****make sure your freelancer/hire knows what kind of tax treatment to expect. ****There are very different consequences at tax time for both of you and planning for one but getting the other could cause unnecessary costs and headaches. For example, I believe if you treat them as an independet contractor, they can take a host of deductions (home office, etc.) whether or not they’re incorporated. If they don’t plan ahead (record keeping and otherwise), they could lose out on a lot of deductions.
I assume he is in the US. Foreign country contractors have different rules.
Whether or not he is incorporated makes no difference. if you pay him more than $600/year and he is an independent contractor then you issue him a 1099. Before you pay him, he should give you a completed W9 form (that’s federal, there are state forms as well depending on state). This indicates what his tax payer ID is so when you issue the 1099 you know who to send it to. Once you issue the 1099, your obligation is done if he is actually an independent contractor.
If he is an employee, then you will need to take federal and state (if applicable) withholding, disability, worker’s comp, unemployment, etc. Those items are required to be periodically remitted to the various federal and state agencies responsible, and the paperwork is cumbersome if you aren’t set up to do it.
There are no hard and fast rules to determine the difference between contractor and employee, but theIRS does issue some guidelines that can be used as such. This is the guidance for my state of California.
Your transaction is much easier if he’s a contractor.
“Whether or not he is incorporated makes no difference. if you pay him more than $600/year and he is an independent contractor then you issue him a 1099.”
Not according to my CPA. I am incorporated and I often get 1099s anyway, but they are essentially meaningless–payroll companies issue them automatically. You don’t issue a 1099 to the auto repair place that does $1000 of work on your car, and for tax purposes there is no difference between the auto repair shop and my corporation.
To answer all of your questions: Yes, pretty much. I mean, I might provide him with some loose guidance or feedback, but he’d be basically free to work however he wants to.
Thanks. Now I know nothing about accountants–is there a type I should look for specifically (and is there a good place to start looking, or should Yelp do the trick?)?
Thanks everyone for the help so far!
That’s my point. There is no downside to issuing them - even if the receiver is a corp.
Are you going to trust that the person you are engaging is a corporation and is reporting their income correctly? The 1099 isn’t for the benefit of the contractor - it’s to protect you by declaring tpyve paid this person money. Their legal status doesn’t affect you so you are better off issuing the 1099. If they declare the income and have their own deductions and file their returns it’s irrelevant to you. They can safely discard the 1099 in that case. But as the person assuming the risk - you’re better off just issuing it to them and let them work it out.
First make them give you a W9 before engaging - then issue the 1099 at the end of the year. This covers you from the accusation that you paid people without reporting it.