Hiring independent contractors instead of regular employees comes with considerable benefits. For example, you’ll have more flexibility in hiring and staffing. With contracting, you can bring on specialized workers for specific projects, and you have the freedom to easily move on to another contractor if your working relationship doesn’t shape up as you expected.

Contractors may be right for your business, but there are some risks and disadvantages too. For example, contract workers tend to come and go more frequently. Before you hire this type of worker, make sure you understand the legal implications and your responsibility as an employer.

Classifying Independent Contract Workers

How you classify your workers makes a big difference in how you pay them, how they’re taxed, the benefits they receive or don’t receive, and how you handle insurance. It’s essential to understand what a contract worker is and how they differ from employees to avoid penalties and legal difficulties. Independent contractors typically have the following characteristics:

  • Hired for a specific period of time, for a predetermined price
  • Not subject to tax withholdings
  • Have a significant degree of autonomy in the work they do for a company
  • Expected to be prepared to do the work, and therefore not provided with extensive training
  • Not entitled to specific benefits, such as group health care or sick days

You may want to hire a contractor for a short-term project. Or, if you have work that requires special skills and it would be cost-prohibitive to train an employee to do it.

Independent Contractors and the IRS

It may seem like the benefits make hiring an independent contractor a no-brainer, but there are rules. For example, the IRS views employees and contractors differently. If you try to shoehorn a traditional employee into a contractor role, you can get in trouble. The IRS looks at several factors to determine if someone is truly a contractor:

  • Are they required to complete training through your business?
  • Do you give a lot of instruction and direction on how to do the work?
  • Do they have to work set hours, or can they work on their own schedule?
  • Do they work at your place of business or somewhere else?
  • Is the work they do full time and ongoing?
  • Do they receive payment hourly or weekly or at the end of a project?
  • Do you cover their associated costs, such as for travel or equipment needed to do the work?
  • Do you provide them with benefits?

You should be able to answer no to most of these questions to ensure someone is a contractor and not an employee. If the IRS disagrees with your classification, you may become liable for employment taxes.

Understanding Insurance Needs

Your company has different insurance needs based on hiring contractors or employees. For instance, most states do not require businesses to have workers’ compensation insurance for contractors, and you’ll need to know the laws in your state to determine if you need to provide this coverage.

Liability insurance is another important type of coverage for businesses, as it protects you from the costs associated with injuries or property damage to clients, damage to rental property, and advertising injury.

Independent contractor liability insurance isn’t required by law, but many employers do choose to include contractors in their liability policies, especially those in the construction or advertising industries. The costs of lawsuits can add up and even put you out of business. The more contractors you hire, and the more frequently you work with them, the more important this coverage becomes.

Insurance and Contractors: An Important Consideration

Hiring independent contractors for your business may be a smart move. It could save you money and expand your ability to offer services or products. The risks, though, can be big if you don’t do it right. Don’t get caught with a contractor who makes a mistake and is uninsured. Check on coverage and talk to your insurance agent to be sure you have the right policies in place.