When you are a sole proprietorship and a small business, you'll come to a time when you need to hire additional help. The help might be for a temporary project or because your business is growing, but not fast or large enough for a full-time employee. In these types of situations, a sole proprietor can hire a contract employee, more commonly referred to as an independent contractor.
An independent contractor markets her services to other businesses. She might work for one large project before moving on to the next assignment or set up a long-term relationship with another sole proprietor. An independent contractor can have several business relationships and might move among several businesses in a day. Independent contractors include hair stylists, interpreters, court reporters, computer technicians, paralegals and consultants.
Hiring an independent contractor gives you the ability to negotiate the pay on either an hourly or per project basis. Because she is her own separate business entity, you are not required to deduct taxes from the money your pay her for her services nor are you responsible to pay taxes into her account. You are required to provide her a 1099 at the end of the year with a total amount paid for her services.
Several advantages to hiring an independent contractor exist. Besides the tax advantage, you also save money on workers compensation insurance and health care premiums because she is not your employee. Additionally, there is little possibility of a wrongful termination suit, again as she is not your employee. One big advantage is that you can use her services on an as-needed basis and then let her go until her services are necessary again. This flexibility allows you to take on large jobs with the peace of mind of knowing there is assistance available.
As the lines between independent contractor and employee can begin to blur, ensure that you keep the business relationship on track. An independent contractor sets her own hours, provides her own tools -- although she can use yours -- and exerts control over the production of her work. It can help to have a contract drawn up delineating the business relationship between the two of you that spells out her independent contractor status.