If you’ve ever worked with an independent contractor, you know that contractor management is completely different from employee management.
From onboarding and payments to legal and tax compliance, almost every aspect of working with non-payroll workers requires different processes and different tools.
In this guide, we’ll cover everything you need to know about independent contractor management so you can get the maximum value out of your freelancers—without the stress or headaches.
Contractor management vs. employee management: what’s the difference?
Contractor management differs from employee management mainly due to different regulations. Businesses have different obligations to freelancers when it comes to taxes, social benefits, and protections.
1. Nature of the working relationship
While employees are permanent members of your team, freelancers and independent contractors are not. Of course, it’s possible to establish a long-term and valuable work relationship with freelancers and contractors, but they are not technically a part of your organization. They aren’t on the payroll, they don’t have a title within the organization, you are not required to cover their business expenses, and you can terminate the working relationship at any time (in accordance with the terms of your contract). It’s all because labor laws do not apply to independent contractors.
From a legal standpoint, one of the most significant differences between employees and contractors is that, in most countries, the government will define if your worker is indeed an independent contractor due to workforce classification laws, like AB5. When it comes to defining a worker as an employee, it’s solely up to you.
As an employer, you are responsible for withholding federal and state income tax, Social Security tax, and Medicare tax from employees’ pay. Every year, you will submit a Form W2 to the IRS, which includes all of this information.
In comparison, freelancers and contractors are responsible for filing their own income to the IRS, paying Self-Employment Taxes, (which cover Social Security and Medicare), and paying income taxes. If a non-payroll worker provides your company services worth at least $600 in one tax year, you need to send them a Form 1099-NEC, which they will use to report their taxes to the IRS.
3. Benefits and protections
Businesses are legally required to provide employees certain benefits and protections, such as health insurance, worker’s compensation, overtime, unemployment insurance, and family and medical leave.
They are also required to contribute to Medicare and Social Security on employees’ behalf. In addition, many companies offer some amount of paid time off, holidays, and retirement plans. Companies aren’t required to provide any of these benefits or protections to freelancers.
Why effective contractor management is crucial
Without a formal approach to independent contractor management, you will face numerous challenges that lower your efficiency and expose your business to risk.
Manually managing contractors’ onboarding, approving invoices, and issuing payments require pouring significant amounts of time into processes that could be automated. That’s time you could be spending on real work.
Moreover, this type of approach is prone to error, which often results in late freelancer payments. Payment delays can easily erode the relationship and cause you to lose great talent. Just as important, the heavy administrative burden associated with manually managing contractors often limits companies’ capacity to scale up their freelancer operations.
Freelancer misclassification also becomes a serious risk without a systemized approach to monitoring compliance. Even unintentional misclassification can result in expensive and damaging consequences, including IRS penalties, back taxes, fines, legal authority penalties, and reputational damage.
4 benefits of properly managing the independent contractor lifecycle
A formal approach to independent contractor management—anchored by a freelance management system (FMS)—simplifies every element of the freelance life cycle. Here’s a look into some of the main benefits.
1. Comprehensive onboarding and offboarding
There are important housekeeping tasks to take care of before launching into the work you hire a freelancer to perform. From signing contracts, NDAs, and IP agreements, to submitting contact information and tax identification, to being granted access to relevant IT systems, there are a lot of boxes to check off during freelancer onboarding.
A systematic approach to contractor management makes it much easier to keep track of all of these tasks and get them done quickly. The same is true for “offboarding.”
Most companies have no process for ending a working relationship with contractors. However, this is crucial to protecting your internal systems and data. With a formal approach to contractor management, you can ensure you suspend their access to your systems and maintain compliance with your IT security protocols.
2. Real-time budget monitoring
Even the most scrupulously designed Excel spreadsheet is difficult to keep updated and accurate over time, which makes manually tracking your freelance budget a challenge. With a system that centralizes freelancer payments and automates budget monitoring, you can gain instant visibility into your current budget at any moment. This allows you to know exactly how much you have left to spend, so you can either reallocate budget to other needs or hire additional freelance support.
3. Simplified payments
The task of reading and approving invoices, opening a PO, and issuing payments for freelancers through their desired method and currency is tedious and time-consuming work. With a solution that handles this automatically, you can free managers from the complexity of managing payments while ensuring payments always arrive on time. This is key to keeping freelancers happy and committed.
4. Improved compliance
Disorganized independent contractor management can easily snowball into non-compliance with tax laws, workforce classification, and legal documentation, which exposes you to major risk. A formal approach to contractor management, such as with an FMS, helps you avoid this by constantly monitoring freelancer classification and alerting you when a compliance issue arises. Not only will your legal department love you, but you and your managers will gain the benefit of freedom from monitoring these needs yourself.
Uncap your potential with better independent contractor management
A formal and systemized approach to contractor management is essential if you want to scale up your ranks of freelancers and reap all of the benefits of working with them. Manually managing aspects of the freelancer lifecycle not only creates unnecessary extra work for managers, but it also increases the risk of error, late payments, and unintentional non-compliance.
With a system that handles all of these components for you, you can focus on doing real work and achieving your business goals.