Running a business is hard. But know what else is hard? Doing everything yourself. This is why many business resource experts recommend hiring extra resources, such as independent contractors or freelancers to get things done faster.
While many businesses may find it easy to decide on whether they want to hire an employee or an independent contractor, others don’t. Many small businesses that are generating negligible revenue cannot afford a full-time employee.
Hiring an independent contractor helps businesses with managing deadlines, improving productivity, reducing costs, and completing the tasks smoothly. Plus, you do not have to worry about compensating an independent contractor with employment compensations and other benefits. It’s a simple “get what you pay for” kind of deal.
While all of this is great, there are a few things to keep in mind while onboarding a new contractor or a vendor, or a freelancer for your next gig. You see, independent contractors, although not as complex as employees, come with their share of obligations and tax formalities.
Not all independent contractors are compliant with their tax regimes. It is your responsibility to ask for the required tax information, validate their identities and information, and achieve a foundational relationship to deem the business agreement valid and legal.
To make things a tad bit easier for you, the following will discuss some important points to keep in mind when hiring an independent contractor for your company (regardless of the industry you’re in).
As a business that is about to sign an agreement with another firm or contractor, you have to ensure that the incoming vendor has a clear tax history. For this, you must check the taxpayer identification number against the official records of the IRS. This can be done through W-9 Solicitation.
Once you confirm that the TIN and the name combination of the vendor agree with the official records of the IRS, you can proceed to add the vendor to your vendor list or master sheet.
This step will also help you put a lock on the vendor tax details. Since you already have the vendor TIN and name with you, your accounting teams can save time during the year-end tax compliance rush.
Office of Foreign Assets Control maintains a consolidated list of entities and individuals that have been issued sanctions from the U.S. An OFAC Watch List Check will allow you to verify if the new freelancer or vendor that you’re about to contract with is maintaining business and economic compliance.
By conducting this check, you are protecting your business from falling victim to fraudulent groups and organizations from foreign states that want to use your services and associations to gain access to sensitive information or monetary gains and use the information and financial help for money laundering and terror funding regimes.
Further, this check will help prevent your business from being issued civil notices and penalties from the OFAC, IRS, and related federal agencies. Conducting the check itself will not prevent the penalties, but following the OFAC regulations will help you avoid cutting those big checks.
A USPS business address validation check allows you to check if the contracting vendor or freelancer is primarily operating within the U.S. This check also allows you to check if the contact information provided in the legal documents is the same as the one in the official USPS records.
If the contracting vendor or freelancer is a foreign national but wants to work with your organization temporarily, the tax rules will also change by their social security details, work permits, and legal status. A simple USPS check will allow you to gain insights into all these areas and more.
Some independent contractors that do not have valid tax details will suggest that their small business is exempt from taxes. In such a case, you need to be smart and let the checks decide if they are exempt from taxes or if they’re trying to hide their incomes.
A tax-exempt organization check will allow you to verify if the contracting vendor or entity is exempt from certain or all taxes. It is essential to validate the tax-exempt status of an organization because it could affect your tax withholdings and other compensatory reporting in 1099 forms, which in turn changes the actual tax you owe to the IRS.
If you willfully disregard these points, you might be undervaluing your total payable tax, which might result in file rejections and penalty assessments.
This is an important check because it will help you check the legal status of a business in all 50 states of the U.S. in real-time. This check allows you to check the operational locations of a business across all 50 states, enabling you to verify the geographical presence of the business, legal status, and any state-issued special status in each state.
Further, this check allows you to access legal business documentation of a business, such as the name of the officers in charge, articles of incorporation, MOAs, amendments to articles, annual reports, and other registration information.
This information allows you to check if the entity is as legitimate as they claim to be and allows you to validate the business details through the registration information and supporting documentation.
If you are contracting with another entity for long-term interests and you’re looking at thoroughly vetting their profile, this check is crucial in establishing mutual trust and agreement.
Hiring a vendor for a long-term basis can be a complex task because you are relying on them for some of the most fundamental elements of your business operations. Contracting businesses must be smart about their decision-making and trust the facts provided in the official records of the government.
Please note that checks can only help navigate you through profile vetting processes. You have to put in your business intelligence and intuition to work if you obtain the best results.
But since that is not always possible, Compliancely, a real-time identity verification API is here to provide the much-needed business intelligence through our identity verification solutions.
Learn All About Compliancely