How To Hire a Consultant
By Catherine Kitcho
Making the decision to hire a consultant is relatively easy compared
to the often frustrating paperwork process to bring the consultant
on board. Not only do companies have their own policies, procedures,
and forms, but the State and U.S. Government are very strict about
who can act as an independent contractor and who must be regarded
as an employee. The company or organization hiring the consultant
bears the responsibility of determining whether the consultant qualifies
as an independent contractor, and the hiring organization is also
subject to audit and fines if the Government disagrees.
In California, the Employment Development Department is very strict
about this distinction, and companies are audited routinely because
of their growing numbers of independent contractors. Why is the
State so concerned? Because companies do not have to pay employer
taxes if they hire an independent contractor ( however, the individual
is responsible for paying estimated income taxes to the IRS and
the State, a portion of which is self-employment tax).
The State offers several rules about who qualifies as an independent
contractor. The most critical ones are as follows.
An independent contractor must:
Have other clients (Proof: reference accounts)
Advertise (Proof: business cards, letterhead, yellow pages listing,
print media ads, website)
Have a business license in the municipality where business resides
(Proof: copy of business license)
Not be directly supervised by the client and control their own work
Be a sole proprietor, partner or incorporated ("S" corp or "C" corp).
Proof varies - For a sole proprietor: DBA statement. For a partnership:
copy of partnership agreement. For a corporation: copy of Articles
of Incorporation stamped by the Secretary of State.
Have a taxpayer ID number (SSN for sole proprietor, EIN for partner
or corporation - begins with "77" in California)
For more information on this subject, contact your local EDD Employment
Tax Customer Service Office in California, or call (916) 464-2500.
Generally speaking, it's easier to hire a consultant as an independent
contractor if they are incorporated. That's because the Government
is guaranteed to get their taxes; that's part of the deal when you
incorporate - they can always find you (or fine you, as the case
may be). When you incorporate, there is always a minimum tax that
has to be paid at the corporate level and for the employees.
For sole proprietors and individuals, the proof is more difficult.
Usually a business license, proof of advertising and client references
all must be provided in order to qualify.
Once you have determined that the consultant meets the qualifications
to be an independent contractor, then you will need to have the
consultant fill out an IRS W-9 form, and sign a consulting contract
with you. Your company may already have a form or contract that
they use,or you can put one together. A consulting contract at a
minimum needs to contain the following:
1.The names and addresses of the parties.
2.The term of the agreement (calendar dates when services begin
3.Description of services being provided.
4.Compensation (hourly rate or lump sum estimate). Sometimes the
contract may refer to a purchase order instead that identifies the
5.Invoicing procedure and approval of invoices, and terms for payment
6.Nondisclosure or confidentiality clause, as appropriate.
7.A termination clause.
8.A dispute resolution clause.
9.Signature lines for both parties to sign and date.
There are several self-help books on writing your own contracts
that have templates and samples. A good one is "Write Your Own Business
Contracts", by E. Thorpe Barrett.
Your consultant should be more than willing to help you get the
paperwork filled out and in place. If the consultant is hesitant
about providing the necessary information to you, be suspicious.
Ask for references and check them. Also, it is not advisable to
have the consultant start work without at least a signed consulting
agreement in place. That agreement protects both parties and establishes
the business relationship in case of dispute.
I hope that these tips will make your job a little easier.
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