The COVID-19 pandemic resulted in major shifts in the business landscape. Government measures intended to cut down on the spread of the virus resulted in millions of employees working from home rather than in the office, and massive changes across many industries.
One of the most dramatic changes was the rise in the gig economy, people working as independent contractors rather than part- or full-time employees at one company.
Even if you were initially taken aback by the shift in how people work, there are many reasons why you may want to consider hiring an independent contractor over a traditional employee.
In this guide, we’ll walk you through everything you need to know about bringing a self-employed worker on board, wherever they are in the world. We’ll cover the benefits of this decision, how to avoid common employee misclassification errors, and how to hire both US-based and international contractors legally and compliantly.
Independent contractors vs employees: Differences between the classifications—and the benefits of choosing a gig worker
In 2021, the number of people working as independent contractors—whether they chose to do so part time or full—soared from just under 13 million in 2017 to nearly 24 million. Furthermore, the last two years have demonstrated this number is unlikely to change.
Regardless of whether they lost their jobs or suddenly started working remotely, many people found they were unsatisfied with their current careers, appreciated the additional time at home with their families, and preferred flexible work schedules to traditional, in-office 9-to-5 jobs.
As you think about expanding your team, it’s important to know the legal differences between “employees” and “contractors,” as well as the benefits of choosing one over the other.
Employee vs contractor: What’s the difference?
It’s crucial to avoid employee misclassification. The consequences of making a mistake—whether you’re working with people based in the US or overseas—can be extremely expensive and often include fines, back taxes, and even legal challenges. The IRS, for instance, charges $50 for each W-2 that isn’t paid, as well as unpaid FICA taxes and other penalties, whether the misclassification was accidental or not.
Fortunately, the Fair Labor Standards Act, Department of Labor (DOL), and IRS all provide guidance and rules on how to distinguish between contractors and employees in the US. Here’s a simple guide to help you decide which classification is correct:
- Generally, employees perform work under the direction and, importantly, control of their employer, and are supervised on a daily basis by their direct manager.
- The employer provides them with equipment and other necessary tools to complete their tasks (such as a laptop, desk, chair, and so on).
- They fill out a W-4 for the IRS and have Social Security, income tax, and other mandatory tax-related fees taken out of their paychecks by their employer.
- They do not pay self-employment taxes and cannot be classified as an independent contractor.
- They may receive training from their employer.
- Finally, they work on a regular basis and perform work that is an integral part of the employer’s business.
- Contractors, in contrast, work on a temporary, per-project basis, often for several employers, or “clients,” simultaneously.
- They purchase their own equipment to perform the work expected of them, and they also set their own hours and schedule.
- They generally send invoices to the company, and they fill out form W-9, control their own work, and pay self-employment taxes.
When you’re figuring out which classification is correct for a new worker, be sure to take these factors into account—our Worker Classification Quiz can help.
3 benefits of hiring an independent contractor
Now, let’s review three advantages of bringing on a self-employed, remote contractor over a traditional full-time employee.
1. Financial benefits
When you hire a full-time employee, you spend money training and managing them, as well as providing them with expensive equipment like a laptop. If you used a third-party recruiter, you’re also responsible for paying their fees. And companies that use traditional employees also have to pay benefits like health insurance and Social Security. With US-based and international contractors, however, you won’t need to spend money on any of these.
Self-employed workers are expected to have their own equipment, manage themselves, and come with a set of specialized skills that mean they don’t need lots of training. They also aren’t paid benefits and are responsible for paying their own taxes.
2. Increased staffing flexibility
Many businesses have both busy seasons and weeks here and there where there’s not that much work to do. During the latter, you still need to keep (and pay for) traditional employees. And during the former, you may find yourself overwhelmed with both the increased amount of work and the responsibility of looking for and onboarding a new, full-time employee.
Independent contractors, on the other hand, can easily be hired only for the time periods when your company is at its busiest.
3. Higher levels of productivity
Independent contractors are usually hired to complete specific tasks, and companies have different expectations for them than they do for their regular employees.
For instance, self-employed workers don’t attend company meetings or have the numerous, ongoing duties and projects that inevitably lower the rate at which full-time workers can complete their tasks. Instead, they’re generally hired to complete a few well-defined projects that have specific requirements and a set deadline by which they are expected to turn the project in.
They’re also not as constrained by a legal number of hours per week they can work. As a result, many companies see an overall increase in productivity by using contractors. In fact, according to the 2017 Workforce Productivity Report, nearly 85% of business leaders stated that independent contractors are far more productive than full-time employees.
Here’s one more benefit of hiring independent contractors: with a powerful workforce management solution like Rippling, you can enjoy the flexibility of US and international contractors, while managing and paying them in a single place.
Now, let’s turn to the steps you need to take and the information you should be aware of when you’re hiring independent contractors based in the US and, separately, international contractors who live and work overseas.
How to hire independent contractors legally in the United States
First, we’ll start with independent contractors who are US citizens. These individuals are legally full citizens of the United States who are subject to the rules and regulations of the IRS and pay taxes to the American government.
To make this as simple as possible, we’ve created a five-step checklist you should follow. You’ll find it below...
Step 1: Determine whether you need a federal employer identification number
An employer identification number, or EIN, is necessary for businesses to apply for licenses and permits, hire staff members, open bank accounts, and pay the taxes they owe the IRS.
Pretty much the only organizations that don’t need an EIN are sole proprietorships and single-member LLCs, so if you don’t fall under either of these categories, it’s safe to assume that if you don’t have an EIN, you should get one. It’s free to apply, and, after you get one, you need to register your business with the department of the state you operate in.
Step 2: Make sure you’re compliant with state laws
Registered businesses are required by law to be in compliance with the rules and regulations of the state department of the state they operate in. If you need to apply for an EIN, your next step is to register your business with your state department.
Furthermore, the majority of states require employers to do a background check on an individual they intend to hire—yes, even if they’re an independent contractor.
This is for your benefit: You need to make sure you won’t hire somebody who turns out to be a liability to you in the future. Running a background check can be a lengthy process when done via a third party, but it’s necessary so you’re in compliance with the law. Fortunately, you can use Rippling to run a background check.
Step 3: Create a job description, classify the new employee correctly, and interview candidates
This might seem like an obvious step, but it’s an important one. When you’re figuring out what you need help with, one of the best ways to decide whether it’s a job for an independent contractor or a full-time employee is to write a detailed job description.
This should contain information on whether the person will work from home or if they’re expected to come into the office, the kinds of projects they’ll be completing—as well as the turnaround speed you need them to work at—and how long you’ll need help for.
As we covered in the previous section, independent contractors work for a temporary, generally pre-specified period of time. A person can start as an independent contractor and eventually move to full-time, but they need to be classified correctly both times.
Remember: An employee cannot be legally classified as a full-time employee and an independent contractor.
Step 4: Write up an independent contractor agreement
You can do this step by yourself, but, at minimum, you should have a lawyer review it before you give it to the new hire.
This agreement is a legally binding, written contract that not only officially classifies the new employee for both the two of you and the government, but it also defines the exact nature of your relationship and frequently includes a non-disclosure agreement (NDA). It also details the kinds of projects they’ll be working on, who owns the rights to any work they produce, how and when they’ll be paid, whether they’ll receive any equipment from you or not, and a termination clause.
With Rippling, you can effortlessly manage all employee documents in a single system.
Step 5: Gather the necessary paperwork and have the independent contractor sign it
The final step is to put the legally required paperwork together and have the independent contractor sign it. Here’s a basic list of what you’ll give them:
- The written contract
- W-9 form
- 1099-NEC form
Make sure everything is filled out properly before you sign it, and be sure to make copies for both yourself and the contractor, and file the original in a secure document management system.
Rippling can automate this busy work for you. We set up employees and contractors across the globe with everything they need—from offer letters to benefits to corporate cards. Admins can get through the hiring flow in just 90 seconds.
How to legally hire international contractors
When the pandemic forced people to work from home, it also opened the door to hiring talent around the globe. Remote work meant that companies were no longer limited to hiring only people who lived in their town, state, or even their country.
It’s now easier—and more common—than ever to find exceptional talent in other parts of the world. In fact, Google Trends data has shown that the search for global talent has increased by a staggering 203% in the last five years.
This is not only a great avenue for companies because of the wider pool of skill sets to choose from: It also provides greater savings than hiring a US worker, because many other nations have lower labor costs.
Studies show that US companies save, on average, nearly 8% by hiring foreign contractors, largely because they are not responsible for Social Security and Medicare. Hiring a US citizen will cost 18% to 26% more than the base pay they’ll receive, driving up your corporate expenses. Let’s say a US employee’s base pay is $30,000. Their real annual cost for the company will wind up being somewhere between $35,400 and $38,400.
Generally, the steps to hiring a foreign contractor are similar to hiring an independent contractor from the US. The differences lie in the laws you’ll need to be compliant with, including both labor laws and relevant tax regulations. You’re not just subject to the laws of the US. You now need to check the laws of the country your new contractor is in, because you’re subject to those, too.
One of the crucial steps to legally hiring a global contractor is using a compliant contractor agreement. With Rippling's Global HRIS, you will have access to contractor agreements reviewed by local employment lawyers for more than 50 countries—ensuring that you don't need to know the A-Z of local laws.
Here’s a brief overview of the tax forms international contractors should sign, as well as some labor laws and information about contractor payments US employers should be aware of.
Which tax forms do international contractors sign?
The tax forms for international contractors aren’t the same as those self-employed Americans sign. Instead of a W-9, each new foreign contractor should sign and submit Form W-8BEN, which certifies that they don’t need to submit forms to the IRS because they aren’t a citizen of the United States. Even though you won’t need to report the money you pay to these contractors to the IRS, this form is necessary to determine tax reporting and withholding obligations. If you don’t have it and the worker qualifies as a foreign contractor, you may find yourself facing possibly severe penalties from the other country’s government.
There’s another consideration to keep in mind regarding foreign taxes. While the US tax season takes place from January until April 15 each year and self-employment taxes are reported once each quarter, the tax seasons differ from country to country.
Considering the complexity of tax laws, it’s best if you hire a Certified Public Accountant (CPA) who specializes in overseas tax laws so you ensure the right forms are filled out and that you have all the information about the tax requirements of the specific country the worker holds citizenship in.
What should US companies know about foreign labor laws?
The labor laws of each country are different, so again, you’ll need to check out the rules of the nation the employee or contractor is in. Here are a few aspects to be aware of when hiring international contractors:
- Public holidays are different: True, you don’t have to pay self-employed workers for public holidays. However, you will need to take these into account so you can set your deadlines appropriately, as many nations’ public holidays differ from those in the US. Canadians, for instance, will celebrate a Civic Holiday on August 7, 2023—see more on our Canada country guide.
- International contractors may enjoy different employment protections and rights to take leave from work: While foreign workers are generally protected from discrimination according to age, sex, religion, and gender just like US workers, some nations have gone further than the US to protect their employees, even those who work as contractors. You should take particular care checking the labor laws of each country to ensure you understand the regulations that apply to terminations as well as the types of leave self-employed workers are entitled to.
- You need to specify the currency in which they will be paid: Don’t just assume your international contractor will be paid in US dollars. You may need to convert the amount you would pay in US currency to the equivalent in theirs. This should be specified in the contractor agreement before they start working. This is another thing Rippling can do for you automatically. With Rippling, you can pay everyone in their local currency—in minutes.
Although hiring workers around the globe might seem complicated, don’t be put off. Not only are there many benefits to working with non-US citizens, but Rippling offers a simple solution to managing international contractors and will help you hire new talent quickly and in compliance with their nation’s laws.
Disclaimer: This blog post is for educational purposes only. It is not intended to provide legal advice and does not substitute for the advice of counsel.