Learn how to avoid common mistakes and compliance issues when hiring 1099 workers, contractors, freelancers, and consultants.
Working with the liquid workforce – freelancers, contractors, and independent consultants – is a critical component of any strategic talent resourcing strategy. Using the liquid workforce is a smart way for companies to tap into deep expertise or on-demand brainpower. It’s a win/win for companies that can now find talent outside their geographical limits or potentially reduce costs, and for individuals, who gain flexibility and choice through self-employment. However, it’s easy to make mistakes when hiring freelancers and contractors if you don’t have the right processes and procedures. These mistakes can have legal and tax ramifications for your company. Find out the most common mistakes and how to avoid them.
1. Using Your HR Payroll System to Pay 1099 Workers
Many behavioral, financial, and control factors determine if a hired individual is a W2 employee or a 1099 independent contractor. These factors are based on the concept that you must treat W2 employees and 1099 workers differently. As part of this differentiation, the data should be separated and managed in separate systems — don’t pay your 1099 workers from your HR system. Lawyers who advise startups often tell us that when they review employment and 1099 practices for companies, one of their first recommendations is to separate 1099 workers’ data from W2 employee systems. The separation of data goes towards showing a different treatment. Failing compliance requirements for 1099 workers can put your company at risk for liabilities and penalties.
2. Not Executing Contracts with Freelancers and Contractors
You should always execute an independent contractor agreement or master services agreement (MSA) with every freelancer and contractor. Contracts are essential as they establish the legal terms between your company and the 1099 worker, providing clarity and protection for both parties. Contracts also help with compliance requirements by clearly establishing your hirer and independent contractor relationship. Using a vendor management system like Liquid, which includes contract management, can simplify and standardize your contract management for 1099 workers.
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3. Not Executing Detailed Work Orders / SOWs
In addition to executing an MSA, it’s essential to create a detailed and specific Work Order (WO) or Statements of Work (SOW). A clear WO / SOW delineates the project deliverables, how and where they will be provided, and how to measure the completion of the deliverables. Not using an SOW creates the risk of misunderstandings and disagreements on whether the project/work is complete and to expectations. The more detailed your SOW is the greater the likelihood that the project will be successfully completed and that you’ll build a strong relationship with the freelancer.
4. Not Establishing a System of Record
Having all essential documents at your fingertips is critical not only for managing your 1099 workers but for compliance purposes. You always want to be ready with all your documentation and history in case of an audit to validate work classifications. All your related documents, such as contracts, WOs/SOWs, NDAs, W-9 forms, and more should all be kept up-to-date and in one place. Using a freelance management system (FMS) like Liquid not only ensures that you have all your documentation organized and readily accessible but that all the necessary documentation and forms are completed prior to onboarding a 1099 worker.
5. Not Having Full Spending Visibility for the 1099 Workforce
For the average company, analysts estimate that nearly 60% of contract spending goes unaccounted for in financial planning, forecasting, and budgeting. Many times 1099 worker spend is not centrally tracked, with data often living in multiple spreadsheets. For Liquid clients, we’ve found that before switching to Liquid, on average, our clients were using seven different systems to manage their 1099 workers. Managing your 1099 workers in one system helps every team that interacts with your freelancers and contractors save time – including finance, legal, and HR. It also helps your company effectively manage vendor spending.
6. Not Supporting Your Vendors
You need to support your 1099 workers just as you would a supplier or any other vendor. Make it easy for them to work with you and have the right tools to support them. For example, make it easy for your freelancers and contractors to send invoices and keep track of payments. Helping your vendors succeed creates strong relationships and builds a strong resource network to support your company.
7. Using Manual Processes or Multiple Systems
Inherently, using vendors creates complexity. And with complexity comes the likelihood of significant administrative burden and errors. Founder Jing Gao of Fly by Jing initially managed her company’s contractors manually. When she switched to using Liquid to manage her contractors, she saved dozens of hours every month. For your company to fully take advantage of the benefits of working with the liquid workforce, you need your processes and system to be as simple and easy to use as those for working with your employees.
Paying Freelancers and Vendors?
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8. Limit Usage Due to Worries About Compliance and/or Administrative Burden
Sometimes companies limit or choose not to work with freelancers and contractors because they are concerned about compliance risks and/or the extra administrative burden involved. Not engaging with the liquid workforce limits your company because you are limiting your talent and resource pool. Modern companies are increasingly using a more fluid workforce to compete. Hiring liquid workers allows your company to plug in talent anytime, anywhere, and for varying durations – it’s a cost-effective, flexible, and smart way to amplify your resources with the best talent.
Following these tips can help you avoid the most common mistakes when engaging 1099 workers – whether independent consultants, contractors, or freelancers. Your available talent pool is now expanded beyond your full-time workers and is that much bigger and better.