Building a business is all about assembling an awesome team to back your vision for a better future. No one can build a tech start up alone.
There comes a time, often after a round of fundraising, when you need to start recruiting. Some skills don’t necessarily need full or part time staff member. Sometimes, a contractor is the best option. This could be for a short-term project or an ongoing activity that requires just five hours of input a week.
When and why should you hire a contractor?
Contractors are useful when the amount of work required is less than a full or part-time member of staff would do over the course of an average month. Contractors are ideal for project work; e.g. build an iOS app over a three-month timescale.
Contractors are also, usually, more cost effective than hiring an agency or consultancy firm. As a line item expense they’re easier to manage, since they handle their own taxes, which usually reduces the cost burden on companies. All you pay is their monthly or per-project invoice.
Contractors also bring perspective and expertise, which is why they are great when you are tackling challenges too big, complex, or specialized for your team to handle.
How does it affect your payroll?
While there are no direct (government funded) tax breaks for hiring contractors, it can still be a financially viable alternative for many companies, because the responsibility of paying government taxes is on the contractor.
But that doesn’t mean that you, as the founder, are completely devoid of responsibility! You still have a small – but very necessary – role to play, if you want to keep the IRS happy.
At the end of every financial year, you need to fill out IRS Form 1099-Misc for all payments to contractors over $600, wherever they are in the world.
It is also valuable to note that misclassifying contractors as employees can have very serious consequences with the government, which can result in some hefty penalties. In order to ensure that the correct client-contractor relationship is maintained, we recommend reviewing the guidelines the IRS uses to assess the overall nature of the relationship.
A look at the pros and cons of hiring contractors:
How to find and hire the right contractors
You now have a better understanding of what defines a contractor, some of the advantages and disadvantages of hiring them and their effect on your payroll. Now let’s discuss where you can find contractors for hire.
Start within your network. Chances are, other founders and business owners have experienced the good, the bad, and the ugly when it comes to contractors.
You could also look at sites like Upwork (formerly oDesk & Elance), CloudPeeps, 99Designs, and LinkedIn, all of which are specialist websites that can help you find and hire the best freelance talent.
Searches for “designers in New York” are awfully broad, and most contractors are too busy looking after clients to maintain an SEM campaign!
How to shortlist
When shortlisting, don’t just think about price.
Naturally, you should stick within your budget, but consider an exceedingly low price an automatic red flag; whereas a high price can sometimes be negotiated down.
Take a look at the cross-section of customers they advertise. This will give you a sense of the sectors and clients they work with, signs as to whether they would be a good fit or not.
Contractors are no different from employees when it comes to your company culture – they have to be a good personal and cultural fit, and they still need to get your company and brand values.
Once you’ve made a shortlist, see who has availability and set up in-person or online chats.
There are two ways you can find the best contractor for your business.
If you’re in a rush and have a tight deadline, go with someone a friend or contact recommends. Some might even reach out themselves, giving you the perfect chance to contact them back and to see if they’d be interested in working on a trial project.
A trial project is the best way to find out what they’re capable of in practice. Whether that’s a logo design, a few articles, or some social media updates.
Always test their skills, and then agree to a longer commitment.
The alternative route is to go through the same kind of interview process you would with a new member of staff, and then set a trial project.
How to create a happy and productive working relationship with contractors
The last thing you want from a contractor relationship is for them to be cringing every time you email, or you to be spending hours giving feedback. All you need is the work delivered, minimal feedback, and input. Job done, then you pay them.
Most contractors take pride in their work. Most clients would hate to be thought of as a nightmare to deal with. And yet, contractors let clients down and clients cause contractors unnecessary stress – far too often.
Here’s how you avoid this scenario:
- Set expectations before work starts. Can this be delivered within the timescale and budget; are there any problems you anticipate? A good contractor knows it’s better to be honest than say they’ll do everything tomorrow. Don’t try and force a contractor to agree to an unreasonable expectation if they know delivering will be impossible, or will result in rushed, poor quality work.
- Have a responsible point person on staff to ensure timely responses. Most experienced contractors can work with minimal supervision. But all, at some point, need client input. The last thing they need is to be waiting weeks for you to give them materials or feedback, only to be asked to turn around a project within an unrealistic timescale.
- Respect the fact that contractors have other clients. For you to be legally secure in this relationship, they need to have other clients. Otherwise, you’ve misclassified an employee. This should always remain a business relationship where one provides a service to the other. The government has a low tolerance for businesses that “misclassify” employees as contractors. Just see how well that worked out for Homejoy and Uber.
- Be aware of time zones. The contractor marketplace is not limited by geography, which means you could be working with talent from across the world. Most of the time that works out fine. Some tasks, however, need time-sensitive responses, so recruit accordingly.
- Trust is essential. Trust and respect work both ways. Both parties should establish an agreed-upon method and frequency of keeping in contact.
- When/how often to pay them? Most contractors will already have pre-defined payment terms and agreements for you to sign and adhere to. Nightmare clients are slow at paying, but rush working timescales. If you do your best to stick to their payment terms, everything will run smoothly. Normally, it would be at the end of each month, sometimes with a 30-day payment period.
- When to renew or terminate a contract? As both parties should have a get-out clause, you don’t always have control over renewing or terminating a contract with a contractor. It is good practice for both sides to give as much notice within reason.
Sourcing Contractors. There’s a multitude of ways to find awesome contractors. Start within your network, and then marketplaces, LinkedIn and Google. See what they can do before you hire them, and ideally agree to a trial project.
Working Together. Make sure you have a cultural/value fit with them. And always agree on what a win looks like in advance: what do both parties expect, what are you aiming for, and can they deliver?
When you’re working together, ensure someone handles moving projects forward. Ensure there’s trust and that both parties are getting what they want from the relationship.
Taxes. They pay their business taxes; you pay yours. It should be that simple. A business relationship is a basis of how you work together. Just make sure you fill out IRS Form 1099-Misc, and everyone will be happy.
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