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4 Steps to Take Before You Hire a Subcontractor

By: Mike Kappel


Your favorite customer calls you and wants you to complete a job. You have a dilemma—you can’t complete it in a timely manner, but want to keep this client happy. Good news: Your old buddy, Mark Jones, can handle the work for you as a subcontractor. The job will get done, you’ll maintain your good relationship with the client, and everyone will be happy.

Hiring a subcontractor may be a great solution to your problem. But before you hire Mark or any other contractor, follow these pointers. 
1. Make the contractor give it up. Mark may be a good buddy, but he may not want to tell you everything—especially his tax ID information. (If a contractor balks at supplying his business information, he may not want to claim the income on his taxes.) 
Make sure the contractor completes Form W-9, Request for Taxpayer Identification Number and Certification, and actually returns the form to you before beginning the work. (You may find it more difficult to collect this information later, especially after the contractor been paid.) Form W-9 asks for the contractor’s name, business name, Taxpayer Identification Number, and type of business entity (sole proprietorship, corporation, etc.). The contractor also has to certify that they don’t owe backup withholding to the Internal Revenue Service.
Why is Form W-9 so important? You need the W-9 to document the contractor payment with the contractor with the IRS. Once the contractor returns the W-9 to you, keep it on file. You’ll need it at the end of the year when you give the contractor a 1099-MISC, showing the amount you paid for all work completed. You’ll also send Form 1096 to the IRS, which summarizes all 1099 forms you sent to any contractor. 
2. Get the details of the job in writing. You may hesitate to make your old friend sign a contract that spells out the scope of the work, the total cost, who pays for materials, a time frame for completion, and cancellation policies. But a contract can actually help preserve your relationship. And any true professional should be happy to sign an agreement, which can help protect all parties.
3. Make sure your contractor has the proper insurance. Ask the contractor for a copy of their liability insurance and certificate of worker’s compensation. Check the dates of coverage and make sure the contractor is currently covered, and contact your insurance company to make sure the subcontractor’s liability limits are adequate.
4. Make sure that your contractor is really a contractor—and not an employee of your business. You may have hired Mark to do just one job, but are you providing detailed instruction, tools, and other supplies? If so, the IRS might question the relationship and consider him an employee, leaving you on the hook for unpaid payroll taxes and penalties.
How do you determine whether a worker is a contractor or an employee? The IRS has set up Common Law Rules to help answer these questions and determine your next steps. (If you’re still not sure, you can also file Form SS-8 to request the IRS’s help with a determination of worker classification, but it can take up to six months to get an answer.)
Hiring a subcontractor can be a great way to keep your business moving forward and maintain your good business relationships with customers. Just make sure to protect yourself in the process.
What else should you do before hiring a subcontractor?
Published: September 3, 2013

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Mike Kappel

Mike Kappel is the president of Patriot Software, Inc., which develops affordable online software for U.S. small business owners. Patriot Software is one of five successful small businesses he’s started in the last 25 years. He still enjoys the challenge of a start-up, and shares his experience and passion for entrepreneurship in his blog, the Small Business Expert. Contact him at mkappel@patriotsoftware.com. You can also follow him on Twitter @MikeKappel and on Google+.

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