Hiring Freelancers: A How-To Guide
Published on March 12, 2022
As a business owner, you may at some point need to hire a freelancer. Freelance work can be a great way to get specialized tasks done without committing to full-time employment. However, there are tax implications for hiring freelancers that you need to be aware of. In this how-to guide, we will outline the basics of what you need to know to stay compliant with tax laws.
When should a small business begin hiring freelancers?
There is no one-size-fits-all answer to this question, as the decision will depend on various factors such as your business’s needs and budget. However, there are some times when hiring freelancers can be particularly advantageous.
For example, freelancers can be a great option if you need extra help during busier seasons or want to test out a new service before making a total commitment.
One of the best times to consider hiring a freelancer is during a time of growth when you can’t reasonably afford the additional costs of an employee. Employees not only come with different tax burdens, but they also bring other additional costs such as health insurance and retirement benefits.
Hiring a freelancer is a great way for small to mid-size businesses to compete with more prominent companies during growth phases.
What are the best resources and platforms to hire freelancers?
With the explosion of freelance work, there is no shortage of places to find good freelancers. Unfortunately, the process can be overwhelming. I will share a few tried and true platforms with you, along with a brief snippet about each.
Each of these platforms is reputable, but at the end of the day, the primary keys for a successful experience are 1) being transparent with your project parameters and expectations, 2) thoroughly reviewing the experience of potential freelancers, and 3) vetting the freelancer’s references.
Here are some of the most popular freelancing platforms:
Upwork. Due to their longevity in the field, quality of the platform, and quality of freelancers, Upwork has almost become the Google of freelancing platforms. If there is any drawback, it is that freelancers know how popular the website is, so in competitive fields, you will wade through a lot of very similar job postings.
Fiverr. Fiverr is a bit of the wild west. Nevertheless, we’ve found great freelancers on this platform and for highly reasonable prices. One caveat is that there are significant differences in quality.
Don’t hire the guy who will redesign your website for $50 bucks, ok?
Freelancer. Freelancer offers a wide variety of freelance hiring opportunities. So if you have some random freelance tasks, this is the place for you. The obvious drawback here is that you will have a little more challenging time finding suitable candidates just due to the sheer amount of freelance options on the platform.
What are some important lessons learned while working with freelancers?
Our firm has hired freelancers throughout the years. Some experiences were good, some bad. Here are some lessons that you can learn from our experience.
You Don’t Have the Same Control with Freelancers.
The nature of freelance work, along with the applicable tax rules, gives you less control. You can’t dictate every move of a freelancer. You can’t expect the same relationship that you have with employees. You can demand what you paid for, but you can dictate to a freelancer like you can an employee.
Freelancers Offer Great Strategic and Financial Flexibility.
If you are a growing business or a large established business with a niche product, freelancers can be your best friend. Hiring a freelancer allows you to keep your budget flexible. You will typically save hundreds and thousands of dollars by electing freelance work over full-time employment.
You Will Learn from Freelancers.
We have found that every time we bring in freelancers, we learn something from them. Working with freelancers creates new business relationships. While they work on projects with you, you’ll pick up more technical knowledge, and you may be building ties that lead to future fruitful projects.
Freelancers are like what I call “playground friends.” Have you ever watched kids that have never known each other start playing on the playground like they’ve known each other for decades? That can be your relationship with a freelancer if it goes well.
Maybe after the playground, you never see each other again, but you had a good experience, and everyone wins.
What are the tax implications for hiring freelancers, and how can a business stay tax-compliant?
The tax implications for hiring freelancers vary depending on how the contract is structured. A freelancer is an independent contractor, not an employee. Therefore, it is not your responsibility to pay or withhold taxes for your freelancer as a business owner.
That’s the freelancer’s job. They pay self-employment taxes.
What are your obligations? Make sure each freelancer completes a Form W-9. You will then use that W-9 to complete your 1099. The purpose of 1099 is to indicate how much you paid the freelancer to the IRS.
The reasons are pretty obvious. You use Form 1099-MISC to report the non-employee wages to the IRS, and you also share this Form-1099-MISC with the employee.
In case of an audit, this process protects you on the off chance that your freelancer did not share this income with the IRS.
It will help if you stay compliant with laws for working with freelancers. For example, independent contractor vs. employee classification of workers can make a big difference in your taxes. You don’t want to misclassify an employee as a freelancer because you could have to pay back taxes, lost wages, and penalties.
Hiring freelancers can make excellent business sense, incredible tax sense, and can be a great experience. Use the business skills you already possess when hiring a freelancer, and you will be fine. Who knows, you may even have a good time.
Speaking of a good time, we do freelance SEO work. We can have your website on the front page of Google for a reasonable flat-rate fee.