Mexico — 9 min
If you want to hire someone with specialized skills or are looking for top talent for a short-term project, then hiring an independent contractor in the United States is an easy decision. After all, the country is home to a thriving workforce who is technologically savvy, and ready to work remotely.
Like most countries, the US treats self-employed contractors differently from full-time employees, so there are misclassification risks that you have to be aware of. Besides, each US State has its own employment laws, so you have to be mindful of compliance.
But you’re in luck! We can help you understand compliance requirements to minimize the risks associated with hiring and paying contractors in the US.
This article will take you through key aspects of hiring and paying US contractors, including relevant labor laws, tax and compliance practices, and the paperwork you would need to submit to the Internal Revenue Service (IRS).
While there are many upsides to hiring skilled independent contractors from the US, you have to be aware of your responsibilities under US law before you enter into a contractual agreement with them.
First, you have to understand the difference between hiring an employee vs. an independent contractor. Otherwise, it could lead to employee and contractor misclassification, which could potentially result in serious penalties for your business.
According to the IRS, a worker is an employee when the employer has control over what work is done and how it is done. Irrespective of whether the person is employed part-time or full-time, the status of the worker depends on the substance of the work done by them rather than the title.
On the other hand, independent contractors are those involved in an independent trade, profession, or service. In general, the employer doesn’t have full control over the work of an independent worker. They can only control the result of their work, rather than what is done and how it is done.
In deciding whether your worker is an employee or an independent contractor, you have to consider the degree of control and degree of independence they have in their role in relation to you.
If you’re unable to determine whether a worker is an employee or an independent contractor after reviewing the guidelines on the IRS website, you (or the worker) could submit Form SS-8 to the IRS. They will review the facts and determine the status of the worker.
Here are a few points to consider when hiring independent contractors in the US:
Contractors are responsible for their own income tax payments and self-employment (SE) tax payments. SE tax refers to social security and Medicare payments that are withheld from the pay of regular workers. They must report their own income using different tax forms than employees on payroll.
Employers are not required to withhold any taxes from contractors. However, note that employers have to request that contractors file different forms depending on how much work the contractor does and where they do it from.
If the business misclassifies contractors and employees, they may risk facing penalties or have to take on the liability of paying back taxes.
If you want to ensure that you’re hiring and paying US contractors compliantly and cost-effectively, check out a global contractor management solution like Remote. We can remove the hassle involved in onboarding, paying, and managing your team of independent contractors, based not just in the US, but globally.
One of the most important issues to be aware of when hiring independent contractors from the US is the misclassification of employees and independent contractors. In fact, according to some estimates, in the US alone, 10-20% of businesses have misclassified their workers.
Misclassification can occur, for instance, when a self-employed individual is working in a similar capacity to that of a full-time employee, but missing out on the perks of full-time employment, such as employee benefits.
Any instance of misclassification determined by the IRS can be detrimental to the employer and cause them to be liable to repay additional taxes owed. Harsher fines can be imposed, especially if the company is found to have misclassified employees on purpose.
Additionally, misclassification can also put the company’s intellectual property (IP) at risk. While working with contractors, the company should be concerned about owning its IP and invention rights. Failing to protect IP rights while hiring independent contractors can have disastrous consequences on the business, such as brand damage and costly lawsuits.
Employment laws in the US are governed by the Fair Labor Standards Act (FLSA) which set out labor laws with respect to minimum wage, overtime, hours worked, record keeping, and child labor. These laws are applicable to both full-time and part-time employees across federal, state, and local governments.
However, the protections that are in place for employees generally don’t apply to contractors. For example:
Employees are entitled to receive overtime pay beyond 40 hours per week, whereas contractors can work for any number of hours at the same pay.
Employees are protected from unlawful termination, and if fired they are entitled to unemployment benefits. This is not the case for contractors who have fewer protections against discrimination and retaliation from the employer.
Employees are legally entitled to benefits such as family medical leave, medical insurance, and pension plans. Contractors are responsible for paying for their own benefits and filing their own taxes.
Classifying your worker as an independent contractor in their contract is not enough. You also have to treat them as a contractor to avoid misclassification.
US labor laws can be difficult to understand. But using a contractor management service like Remote can help you hire US contractors in compliance with American labor legislation.
Businesses need to know the differences between tax laws for contractors and tax laws for employees.
There are three general areas of concern:
Federal employment taxes and related obligations, like payroll and income taxes
State employment taxes
Applicable federal or state labor laws
In addition, companies must file certain tax forms when working with contractors to avoid issues of classification and documentation.
Form W-9: The employer should get the contractor to complete Form W-9 which identifies the correct name and Taxpayer Identification Number of the payee. The employer needs to keep this form for four years for reporting requirements if needed by the IRS.
Form 1099-NEC: If the employer pays $600 or more for the year to a worker who is a non-employee or contractor, then the company would need to complete Form 1099, and submit it to the IRS, along with a copy to the independent contractor. In certain circumstances, submitting Form 1099-NEC is not required. These exceptions are explained on the IRS website.
Form W-8 BEN: The employer also has to submit a document used by employers to provide their workers’ information on an annual basis in order to facilitate the withholding of income tax and social security payments. The form is voluntary, but its purpose is to help employers avoid confusion over the worker’s employment status (and thus avoid misclassification). It is the employer’s responsibility to request and provide the W-8 BEN Form to employees and contractors.
There's also the 1096 Form, which is used for reporting non-employee income to the IRS. However, it’s only used when submitting paper tax forms to the IRS by mail.
Independent contractors have to file taxes on their income to the IRS, so companies do not withhold taxes from the salary paid to freelance workers in the US. In addition, individual states and cities in the US also have their own separate taxes that have to be paid on top of the federal taxes, and those entities might charge different rates.
Remote’s contractor management system is built from the ground up specifically to handle US contractor payments on your behalf. Our platform is designed to manage the process of filing the various tax forms you have to submit to the IRS while hiring US contractors, keeping you compliant across federal and state laws.
Sometimes it may be necessary to turn your independent contractor into an employee. This can happen if you’ve decided to retain their services beyond the needs of a specific project. You might even want to do this in cases where the contractor has worked with you for so long that they can be considered an employee.
Converting contractors to full-time employees is a common way to ensure compliance with employment laws. But, how do you know when it’s appropriate to convert a contractor to an employee?
Some common signs that it’s time for you to convert your contractor to an employee:
You want your contractor to take on additional work responsibilities in your company.
You recognize the contractor’s contribution, and you want to retain talent by providing them with benefits.
You want to protect your company’s intellectual property.
You want to update their contract due to an update or changes in the law.
You want to hire your employee for a longer period and save money in the long run.
The process can vary from one US state to another, so you may want help from a global HR partner who understands both your home country's requirements and those of the relevant US labor laws to ensure the conversion proceeds smoothly.
There are a variety of payment methods available to US contractors.
You could use an international banking partner, digital wallets, fintech services, and popular digital payment portals like PayPal or Wise. You could also pay international contractors via bank transfer, check, international money orders, or wire transfers.
Foreign companies looking to pay contractors within the United States usually have to rely on an international contractor management service, which handles invoices and contract management while also handling payments.
Remote’s contractor management platform can help you make quick and easy payments to your US contractors. Remote automates payroll for you, handling all of your contractor management issues in full compliance with federal and state laws in the US. Our system also auto-generates the relevant tax compliance forms that you’ll need to submit to the IRS while hiring independent contractors in the US.
Explore more by visiting the Remote Contractor Management page.
Ensuring compliance when you’re hiring contractors in the US can be a challenge, but we have a treasure trove of resources to get you started.
Get started by checking out this expert guide that has been created to help international companies hire independent contractors in the United States. We’ve done the legwork to help you steer clear of nasty mistakes such as accidentally misclassifying full-time employees as contractors.
When you’re considering hiring independent contractors from the US, you must consider the following critical factors:
The US has decentralized labor laws, and specific requirements can change depending on which state the contractor is located in.
Tax laws vary by state and can be complicated for companies that are unfamiliar with US regulations.
The IRS requires employers to submit relevant tax forms when they hire independent contractors in the US.
The US government takes the misclassification of employees seriously.
Working with US contractors when your business is based in another country can seem overwhelming, but don't worry. Thousands of companies trust Remote to hire and pay contractors in the United States and around the world. Our contractor management platform can help you save time and money, leaving you to focus on growing your business. With Remote, you can easily:
View and manage all your contractors in one platform
Onboard your American contractors with compliant contracts
Automate and pay contractors quickly
Stay compliant with American tax and labor laws
Subscribe to receive the latest
Remote blog posts and updates in your inbox.