Independent contractors vs. employees - What do you need to know?
Independent contractors and employees are, at their most fundamental level, alternate classifications of working relationships between an organization and an individual.
Independent contractors are, as the name implies, independent from the organization. They are expected to manage their own time, utilize their own equipment, and be responsible for their own tax liabilities. Employees, meanwhile, are tied to the organization by employment contracts and are paid a recurring hourly wage or salary.
Figure out where your independent contractor’s income is sourced
One tricky question you’ll want to ask yourself early in the process is which country your contractor’s income is attributable to. The main underlying driver of income attribution is the location in which the contractor performs their labor. There are, however, a few caveats here. For example, if a contractor performs work for an American company while located in the United States for more than 90 days - then any income greater than $3,000 is taxable by the United States government regardless of the contractor’s location for the rest of the year.
Understanding the attribution of your contractor’s income is a critical piece of maintaining full global tax compliance. Grasping the details of your contractor’s income early in the process will save your team time and headaches further down the road.
Get your paperwork right
1) Build an airtight independent contractor agreement
A clear, well-defined contractor agreement can protect your organization and any contractors you hire in the event of any confusion or wrongdoing.
While it can be tempting to find a boilerplate contract online, independent contractor agreements, like any legal document, work best when they are tailored to your particular situation.
Understanding the labor laws of your contractor's home country and the countries you operate in, is crucial to crafting a specific, compliant contractor agreement that fits your needs. The length of the agreement may be limited by certain country-specific requirements. A few key things to include when building your agreement are:
- The scope of work to be performed and a description of the services provided
- Any and all compensation (including any expenses that will be paid by your organization)
- An explicit description of the contractor’s classification and the relationship between the two parties
- Clauses indicating liability and potential indemnification
- Possession of intellectual property produced by the work
- Clauses specifying expectations surrounding confidentiality and data protection
- A non-compete clause providing this is permitted under local governance policies
- The duration of the contract and how either party may proceed with a potential termination
- Clarification of the applicable governing law
2) Getting your tax forms in order
While independent contractors are expected to pay their own taxes, most jurisdictions expect organizations to report any amounts paid to individual contractors.
Although these regulations vary from country to country, you and your team will most often be expected to complete forms that state the amount of income generated by a contractor and that verify the identity of each contractor hired by your organization.
3) The example of the United States
In the United States, there are three key forms you should have in mind when reporting payments made to independent contractors:
- 1099-NEC: This form is used to report payments made to US based contractors by US based companies and should be completed for any contractor that received greater than $600 USD from your organization in one tax year
- W-9: This form is a prerequisite required to complete form 1099-NEC. The W-9 form collects identifying information from the contractor including their name, address, and social security number.
- W-8BEN/W-8BEN-E: IRS form W-8BEN is comparable to the W-9 form but is intended for international contractors. W-8BEN-E should be used for contractors operating under a business entity. It’s important to note that if you do not complete either form for an international contractor you are expected to withhold 30% of their earnings by the IRS.
Using Borderless to Hire Independent Contractors
While this checklist serves as a strong starting point from which to hire international contractors, creating independent contractor agreements, determining which tax jurisdiction is applicable, and organizing your tax forms are all difficult tasks.
Borderless' contractor management functionality will not only simplify your compliance processes, but also enable straightforward onboarding and a simplified global payroll solutions. Using Borderless will let you focus on what matters most - identifying the right talent for your team.
About Borderless
Borderless is a global EOR company of passionate people brought together by the conviction that hiring local talent anywhere in the world can be the greatest form of opportunity equalization.
Organizations that choose to look beyond their brick-and-mortar offices will not only have access to a wider talent pool of highly qualified individuals, but will also be supporting emerging local economies, improving their workforce diversity, and contributing to emission reduction by removing the daily commute. All while increasing their bottom line and reducing their legal liability.
Borderless enables you to become a distributed organization whose members will be empowered to lead the lifestyle they desire without sacrificing their career opportunities or feeling like 2nd class citizens.
Disclaimer
Borderless does not provide legal services or legal advice to anyone. This includes customers, contractors, employees, partners, and the general public. We are not lawyers or paralegals. Please read our full disclaimer here.
