How an LLC Hires an Independent Contractor to Job Complete

Hire the right way, and do it today!

Graycare is NOT a lawyer. Please seek advice from a licensed legal professional before hiring an independent contractor for your Limited Liability Company (LLC).

Graycare LLC is a business entity registered in the State of Michigan. We’d like to know: "Can our business can quickly hire a skilled person we meet on the street to get a job done right now?"

To begin to promote the category of for-profit social entrepreneurship in Michigan, we want to pay contractors money in return for their services — stat! Like say — $20.00 to complete a contract start to finish right now for maybe 15 or 30 minutes. Or maybe the Contract between my LLC and this professional who isn't employed by my business might last several days or weeks in the most common cases of contracting.

Can a Michigan LLC hire an independent contractor?

Yes, a Michigan LLC can hire an independent contractor.

Even better, a Michigan LLC will not need to withhold income taxes from payments to independent contractors. Technically, a Michigan independent contractor can request withholding from their pay (and the employer must agree), but contractors hardly ever ask for that, so you probably don’t have to worry about it.

Five steps for lawful LLCs wanting to hire independent contractors

Graycare is NOT a lawyer.

...Assuming you know the difference between an independent contractor and an employee, and you choose to hire one or more independent contractor(s) for your LLC.

...Assuming you know the requirements of the contact at hand, and also the type of skills, expertise, strengths, and smarts your ideal contractor should service, we can skip the job listing HR know-how to draft a contract.

1. Write the Contract:

Outline the project scope from start to finish, including a schedule of milestones and details regarding payment, confidentiality, and other nitty gritty terms.

2. Get the Form W-9 from the Contractor

It’s best practice to ask your independent contractor for a Form W-9 filled out with their accurate information before making any payments, even if you don’t think you’ll reach $600 in payments to this particular contractor by the end of year.

3. Give Form 1099 to the Contractor

After December 31st, and before the IRS’s due date, the LLC must issue the appropriate Form 1099 — the more-common Form 1099-NEC (Nonemployee Compensation) if your LLC paid an independent contractor over $600 during the year, or the less-common Form 1099-MISC for other types of “miscellaneous” payments. The 1099 adds up total payments made to this particular contractor during the year, so that’s why you have to wait until January to generate your 1099s. You need to issue the 1099 to the contractor so they can do their taxes.

4. File Form 1099 and/or Form 1096 to the IRS

Another Form!? Form 1096 is for businesses to report various types of non-wage income. When you submit multiple Form 1099s for having paid multiple independent contractors during the year, Form 1096 tallies all the payments up into a friendly new form you must fill out. Maybe in 2024 when you E-File online, you don’t need the Form 1096.

5. Keep Clean Books for Years

Keep the original signed contract on file. Maintain record of transitions with the independent contractor for the entire year, including payments, invoices, receipts, work progress reports, progressive site photos/videos, and any other documents for your LLC to prove truth. Keep files for a long time. The IRS recommends keeping past years’ W-9s for at least four years.

Why do unlawful LLCs intentionally misclassify their employees as independent contractors?

Some LLCs with dishonest HR and finance departments try to pay employees like an independent contractor. Because the LLC can sneak tax savings by hiring an independent contractor on the books yet working them like a part-time or full-time employee.

Don’t do that, because you might get in trouble with the IRS. When the IRS types words “you must” because “it is critical”, I believe most LLCs should read the words and follow what they say.

Don’t do that, because it unfairly disadvantages the people you hire.

It’s not clever. It’s known as misclassification.‍

Why is an LLC's unlawful misclassification of employees as contractors is unfair?

Because lost tax revenue means less funding for government welfare programs (like Social Security and Medicare), the IRS frowns upon bad egg LLCs who try to get away with paying the small taxes required for contracting contractors when they’re supposed to be paying the big taxes required for employing employees.

Sneaking away from the many W-2 employee money pit of payroll taxes, unemployment taxes, workers’ compensation insurance, as well as other benefits, training, and admin red tape — you can almost taste the lucious fruits which tempts the cunning LLC to keep quiet about profiting off of unfair labor deals in secret.

Luckily, the IRS Form SS-8 is made for greedy leaders like you, to ask them whether you’ve made a misclassification of your independent contractor or not, and they’ll have the answer you need after about six months of processing.

How to lawfully classify a Michigan independent contractor?

In the United States [Click here for Fact Sheet 13], follow the U.S. Department of Labor’s Fact Sheet to determine whether a worker is an employee or an independent contractor.

In the State of Michigan [Click here for Fact Sheet 155], follow even more closely the IRS 20-factor test to determine which way individual’s performed services should me classified.

Behavioral Control Factors:

1. Instructions - Employees must follow specific instructions on work procedures. Independent contractors decide how work is done.
2. Training - Employees receive training from the employer. Independent contractors use their own methods.
3. Services rendered personally - Employees perform work directly. Independent contractors can outsource tasks.
4. Hiring, supervising and paying assistants - Employees work with employer-hired assistants. Independent contractors manage their own helpers.
5. Continuing relationship - Ongoing work relationships suggest employment. A clear beginning and end of work relationship suggests a contract completed.
6. Set hours of work - Employees have set work hours. Independent contractors make their own schedules.
7. Full time required - Employees typically work full-time for one employer; independent contractors choose their workload.
8. Work done on premises - Employees work on employer's premises; independent contractors decide their work location. However, remote work’s rise and stay has made this factor all the more blurry.
9. Order or sequence set - Employees follow employer-set task sequences. Independent contractors set their own order of tasks.
10. Oral or written reports - Employees submit regular progress reports. Independent contractors may not.

Financial Control Factors:

11. Payments by hour, week, or month - Employees are paid at regular intervals. Independent contractors upon project milestones.
12. Payment of expenses - Employees are reimbursed for job-related expenses. Independent contractors typically are not.
13. Furnishing of tools and materials - Employers provide tools and materials to their employees. Independent contractors manage their own equipment and purchasing.
14. Significant investment - A worker with a large investment in the place of work is probably also an independent contractor (not an employee).
15. Profit or loss - Employees usually receive steady wages. Independent contractors more commonly gain profit or incur loss from the work.

Relationship Factors:

16. Integration - Employees’ work forms main business functions. Independent contractors' work isn’t part of business as usual.
17. Working for more than one firm at a time - Most employees have just one employer. Most independent contractors have multiple businesses.
18. Making services available to the general public - A worker who makes their contract services consistently available to the public is likely an independent contractor.
19. Right to discharge - An employer who retains the right to fire a worker, is typically firing an employee (not an independent contractor).
20. Right to terminate - An employees who can quit freely without breaching contract, is typically unfulfilled waiting for their next pay cycle as an employee (not an independent contractor).

How to file taxes for an LLC which has paid independent contractors?

As an LLC filing taxes after having paid independent contractors, the tax forms you provide to your independent contractor(s), and the tax forms you submit to the IRS depend on the type and amount of payment(s) made from LLC to contractor during the year.

As an LLC, you can hire independent contractors. So you’ll have to file the Form 1099 to the IRS.

As for the independent contractor you hire, it’s most common they file their taxes as a sole proprietor (one individual owner), but they can also file as a partnership, corporation, LLC. The independent contractor’s chosen filing status doesn’t change how the LLC who hired them files taxes.

Form 1099-NEC / Form 1099-MISC is what the LLC files to the IRS

📝 Click here to view Form 1099-NEC on IRS.gov.

📝 Click here to view Form 1099-MISC on IRS.gov.

A responsible LLC uses IRS Form 1099-NEC to report nonemployee compensation every year an independent contractor is paid.

In most cases, that’s one Form 1099 per person to whom your business has paid over $600 during the year. (Or in rare cases, over $10 for intangible royalties like patents, copyrights, trade names, and trademarks.)

It appears, you don’t file a Form 1099 for independent contractors paid under $600 during the year.

Form 1099-NEC can be most efficiently submitted online using the through the IRS E-File or FIRE System. And if you file by paper mail, then (I think) you need to also submit a Form 1096, Annual Summary and Transmittal of U.S. Information Returns.

Form W-9 is how the LLC collects the independent contractor’s tax information

📝 Click here to view Form W-9 on IRS.gov.

The most responsible LLC promptly send a new independent contractor the IRS Form W-9 “Request for Taxpayer Identification Number and Certification”.

However technically, you won’t need to file a W-9 for independent contractors to whom you’ve paid less than $600 during the year, the same way you won’t need to file a 1099-NEC for an independent contractor to whom you’ve paid less than $600 during the year.

If you've made the determination that the person you're paying is an independent contractor, the first step is to have the contractor complete Form W-9, Request for Taxpayer Identification Number and Certification. This form can be used to request the correct name and Taxpayer Identification Number, or TIN, of the payee. Once more to emphasize long-term business bookkeeping, the W-9 should be kept in your files for four years just in case down the road you get friendly correspondence about your LLC's financial past from the worker or the IRS.