To avoid pitfalls from the outset it's important to set expectations on independent contractor and vendor agreements.
Many small business owners have experienced situations where we sought expertise from vendors and contractors only to find the work fell way short of expectations.
As a result the small business was negatively impacted on a host of fronts: time, money, customer service, delivery, etc. This primer will help identify and circumvent some common pitfalls prior to entering an agreement.
Establish clear guidelines with an Independent Contractor Agreement
- Independent Contractor Agreements clearly define expectations for work quality, completion, timeline, and cost.
- For tax purposes, an Independent Contractor Agreement establishes the vendor as a subcontractor, not an employee.
- Consult an attorney to craft an Independent Contractor Agreement that leaves no room for misinterpretation.
If youre a business owner, you may have been unfortunate enough to have found yourself in the following situation:
You entered into a partnership with a new vendor, having discussed the terms of work in advance and come to a mutual understanding. But when the work was delivered, it didnt meet your expectations.
You addressed your concerns with your vendor, but they were insistent theyd delivered exactly what was asked.
Who is right?
And how does the situation get resolved now?
If youve encountered this all too common business scenario, it might be time to take a closer look at your Independent Contractor Agreements.
The Independent Contractor Agreement
The Independent Contractor Agreement is a key business tool that is often overlooked by small- and medium-sized business owners.
Independent Contactor Agreements are used to set guidelines with a vendor, clearly laying out the expectations for their work and detailing terms of quality, completion, timeline, and cost.
A well-crafted Independent Contractor Agreement should define measureable metrics that establish for both parties when the terms of the contract have been met, and how and when payment and deliverables will be conveyed.
If you find that your vendors are not meeting your expectations, it may be time to implement a new Independent Contractor Agreement or revise your existing agreements to remove any ambiguity.
Consult an attorney to design a well-defined set of guidelines that leaves no room for misinterpretation, and be sure to get sign-off from each vendor to make your agreements binding.
Not sold quite yet?
As an added benefit, the presence of an Independent Contractor Agreement will help your business meet IRS compliance regulations regarding subcontractors.
By signing an agreement, both you and the vendor are clearly establishing that this person is a contractor, not an employee. That means your company cannot be held liable for withholding income taxes, withholding/paying Social Security and Medicare taxes, or paying unemployment tax on wages paid to this vendor.
When it comes to vendor agreements, transparency in communication is the name of the game. Start using an Independent Contractor Agreement today to ensure that you and your vendors are always on the same page.
Questions, comments? We'd like to hear from you in the comments section below or email@example.com
The purpose of this article is to provide general best practice guidelines. This article is not written as legal or tax advice directed at the particular facts and circumstances of any specific person or business. We recommend you consult your local CPA or attorney to ensure your unique and specific needs are fully addressed.
About the author
Alexander J. Hart of Cuban American decent is principal and founder of Hart Vida Raffo. With over 25 years of experience, Alex specializes in the areas of tax strategy and planning, business process improvement, and capital consulting. Whether advising on capital and financing strategy or consulting for privately-held professional services firms, Alex has the expertise and practical know-how to help any company optimize their business processes and make tactical financial decisions. He began his career at IBM in sales operations and accounting. He was a Controller for the N.Y. Post, has been a CFO for a medical device company, and has written a tax column called “Ask the Tax Guys” for Micro-Cap Review. Alex is a professional member of A.L.T.A. (Affiliated Lawyers of the Americas), a member of the National Association of Tax Preparers, and is a contributing author and mentor at Latin Business Today. Alex graduated from St. John’s University with a B.A. in Spanish and his M.B.A. in Finance. He obtained his accounting degree from Pace University.Website