Learn how hiring independent contractors works for small business owners.
If you are a small business owner who is currently in the process of growing your business, you may potentially consider hiring new employees such as independent contractors. While independent contractors are distinct from employees from a legal and tax perspective, hiring contractors may be advantageous for financial and strategic reasons.
A small business is not legally obligated to offer health insurance to independent contractors; however, deciding to offer health coverage to one contractor requires a business to provide health insurance to all employees at that level.
What is an independent contractor?
According to the IRS, an individual can generally be defined as an independent contractor if those who pay him or her only have the right to direct the result of the individual’s work, and not what or how the work will be done. If an individual works as an independent contractor, what they earn is subject to the Self-Employment tax.
When hiring workers for your business, it is important to understand the legal differences between independent contractors and employees. Although independent contractors or self-employed workers are often referred to as 1099 “employees,” they are usually not really employees from a tax and legal perspective. The tax forms used for payroll tax deductions, 1099 and W-2s, can be used to help distinguish independent contractors from employees.
- Independent contractors are self-employed, paid as per their contract, and receive a 1099 tax form to use when filing their tax return.
- Employees are paid a wage, offered employee benefits, and receive a W-2 tax form. Their employer will withhold income taxes from their pay, unlike for independent contractors.
While there is no exact definition of an independent contractor, the IRS has suggested that the level of employer control and relationship between employer and worker can be used as ways for small business owners to help classify their workers.
Examples of self-employed workers who may be independent contractors include doctors, building subcontractors, accountants, lawyers, and freelancers.
What are the advantages of hiring independent contractors?
A company may consider hiring independent contractors for several strategic reasons, especially when growing their small business.
- Financial savings – One of the advantages of hiring independent contractors is that they may be a less expensive option than a regular employee. For instance, independent contractors do not require a workspace or need to be compensated with employee benefits. There are also fewer tax conditions associated with hiring contractors compared to regular employees.
- Adaptable workforce – Depending on the scale of your projects, hiring independent contractors may be an optimal choice for completing a variety of short-term goals and objectives. Oftentimes, contractors might be hired as seasonal workers for a few months, or temporarily brought on to cover for employees absent due to family leave or a medical illness.
- Skillset and expertise – Independent contractors often have a particular set of skills or a specialization within a specific field, providing value to a small business with their professional knowledge. Using contractors allows you to benefit from their talent without having to bring them on as full-time employees.
Ultimately, hiring independent contractors may allow you to create an adjustable roster of skilled workers who could help address your needs as a growing small business.
How does hiring an independent contractor work?
Generally, the hiring process for bringing on independent contractors includes recruiting candidates, developing a contract, and completing required tax and hiring documents.
- Recruit independent contractors – The overall recruiting process for independent contractors is similar to the hiring process for regular employees. However, be sure that your job listing specifically stipulates that the position is for an independent contractor.
- Create an independent contractor agreement – A contract for independent contractors should include clear descriptions of the work they are expected to complete, the duration of their engagement, payment details, and relevant sections such as non-disclosure and dismissal.
- Complete hiring and tax documentation – As you onboard a new independent contractor, make sure that he or she submits the proper tax documents, such as IRS Form W-9, as well as the required federal forms needed for new workers.
In order to accurately and efficiently streamline the hiring process, a small business may consider working with a legal, accounting, or tax advisor when deciding whether to hire independent contractors.
Are you required to offer health insurance to independent contractors?
As you manage the hiring process for new employees or independent contractors, you may be wondering whether you have to offer group health insurance to your workers.
According to the Affordable Care Act, a small business with less than 50 full-time equivalent employees is not required to offer group health insurance to its employees. Still, many small businesses choose to offer health insurance to their workers due to the popularity of this employee benefit.
You are not legally obligated to offer health insurance to independent contractors, since they are not officially employees. However, if your small business decides to offer health insurance coverage to one contractor, then you must offer health insurance to all workers at that same level.
Why might you consider offering health insurance to independent contractors?
Although you are not required to offer group health coverage to independent contractors, choosing to provide them with medical benefits may be an effective decision for your small business.
Advantages of offering group health insurance to independent contractors may include:
- Enhanced recruiting – From a hiring strategy perspective, your small business may be better able to recruit independent contractors if you offer them health insurance as part of their job offer. When competing for the services of skilled and talented contractors, a group health plan may serve as a key differentiator for your business, especially when seeking a long-term contractor.
- Consistent productivity – Contractors with access to group health coverage may take less sick days or be less absent, which could be important if they are needed for seasonal work services. When contractors stay healthy, they can remain productive and focused on their jobs.
- Reduced plan costs – Due to the risk pool advantage associated with having more workers enrolled in a group health plan, a larger group of 1099 workers or contractors may lead to reduced premiums for yourself and other workers on the group plan.
Finding group health insurance for independent contractors
eHealth can help you find small business health insurance for yourself, your family, and your employees, as well as independent contractors. Our private health insurance marketplace offers the largest selection of quality health plans available online. When you use eHealth to shop for health insurance, you can quickly compare group health plans from different companies side by side, making it easy for your business to find the right health coverage for your needs and budget all in one place.
Find out what your options are for affordable group health insurance by visiting our small business page at eHealth.com or by contacting one of our helpful licensed insurance agents.
This article is for general information and may not be updated after publication. Consult your own tax, accounting, or legal advisor instead of relying on this article as tax, accounting, or legal advice.