What are the costs and tax implications of hiring an independent contractor?


2

Our company is currently thinking about hiring an independent contractor to expand our software product.

I was wondering what the costs (insurance etc...) and tax implications of this might be if you hire within the country you operate in, and abroad? Does anyone have experience with this?

For example, how do PAYE and National Insurance Contributions work if you hire someone in the UK to do work in the UK.

Do you pay their insurance?

What about hiring someone from the UK to do work in the US? Or vice versa?

In the UK, I've heard of IR35: if the contractor has his own company, he pays the PAYE and you split NICs depending on his annual turnover. I found this article here describing agreements between contractors and employers, but it's geared more for contractors themselves, not employers.

A few things I learned from it are:

  • It's better to define the work to be done very specifically
  • It may be better to pay a lump sum rather than hourly
  • There should always be an "assignment of rights" clause giving you rights to what they develop.

I'm sure this is only one route to take for hiring an independent contractor and would like to learn more!

Thanks,

-Nick

Software Independent Contractor

asked May 25 '10 at 23:44
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Nbeecroft
515 points
Top agency to build award-winning mobile apps: Utility NYC

2 Answers


4

If the contractor is in the UK, they should just hire an umbrella company to take care of PAYE, National Insurance, etc. etc. You actually contract with the umbrella company which serves as their employer of record and takes care of keeping everything legal.

If the contractor is in the US, it's a bit simpler. The contractor submits a W-9 form to you and pays estimated tax to the IRS four times a year. At the end of the year you give the contractor a 1099-MISC form reporting the income.

answered May 27 '10 at 01:33
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Joel Spolsky
13,472 points
  • Awesome response. Thanks for the help Joel, -Nick – Nbeecroft 9 years ago

1

I've written a fair bit about IT contracting on a number of sites over the years - and recommend the sites mentioned above for in-depth detail and also this one. I chanced upon this question in a Google search just now.

Fundamentally, if you're hiring an independent contractor, the contract will be a business-to-business one, i.e. your company will hire the contractor via their limited or umbrella company.

Your company will pay the third party company's invoices (plus 20% VAT in the UK), but importantly you are not responsible for anything else such as insurance as you are not employing the person, you are hiring a company to provide services.

Hope this helps anyone else searching on this topic, Jake

answered Feb 9 '13 at 02:28
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Jake Townsend
11 points

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