Operate · 5 min read
Founder operations: hiring, contracts and paying people
Paying people is where small companies create their largest unforced liabilities. Classification, contracts and payroll are cheap to get right and expensive to get wrong.
The short answer
US companies pay workers either as independent contractors, collecting a W-9 and issuing a 1099-NEC, or as employees through payroll with tax withholding. Classification is determined by the degree of control over how the work is done, not by what the contract says. Misclassification exposes the company to back taxes and penalties.
Formation, banking and tax are decisions you make once. How you pay people is a decision you make repeatedly, and it is where small companies accumulate the liabilities that actually hurt — not because founders are careless, but because the default path is convenient and slightly wrong.
Contractor or employee
This is the one to get right, because the cost of being wrong is back taxes, penalties and interest for every period of the misclassification.
| Independent contractor | Employee | |
|---|---|---|
| Controls how work is done | They do | You do |
| Sets their own hours | Usually | Usually not |
| Uses their own tools | Usually | Usually yours |
| Works for others | Typically | Often exclusive |
| You collect | Form W-9 (or W-8BEN if foreign) | Form W-4 and I-9 |
| You file | Form 1099-NEC above the threshold | W-2, plus payroll tax deposits |
| You withhold tax | No | Yes |
| Employer taxes | None | Payroll taxes, unemployment insurance |
Paying US contractors
- Collect a Form W-9 before the first payment. Chasing tax details in January from someone you stopped working with in March is a known misery.
- Keep a written scope, even a short one. It evidences the relationship and prevents disputes.
- Track payments by calendar year, per contractor.
- Issue Form 1099-NEC where payments meet the reporting threshold, and file with the IRS by the deadline.
- Keep the records. The W-9, the agreement, the invoices, the proof of payment.
Paying contractors outside the US
Simpler than founders expect. A non-US person performing services outside the United States is generally not reported on a 1099. You collect Form W-8BEN (individual) or W-8BEN-E (entity) instead, which documents their foreign status for your files.
Hiring in another country
| Route | Good for | Cost | Risk |
|---|---|---|---|
| Contractor | Project work, genuine independence | Lowest | Misclassification under local law |
| Employer of record | Real employees where you have no entity | $500–$1,000+/person/month on top of salary | Low, but you don't control the contract |
| Your own local entity | Several people in one country, long term | Highest — formation, payroll, filings | Full local compliance burden |
Running payroll
Hiring a US employee means registering as an employer with the IRS and with the state, withholding federal and state income tax, withholding and matching FICA, paying unemployment insurance, and filing returns on a schedule. A payroll provider handles the mechanics for a modest monthly fee, and doing it manually is a false economy.
Two things founders underestimate: registration is per state, so a remote employee in a new state creates a new registration; and payroll tax deposits have their own deadlines with their own penalties, separate from income tax.
Paying yourself
- Disregarded or partnership LLC — you take owner's draws. Not a salary, no withholding; tax is handled on your personal return.
- S-Corp election — you must pay yourself a *reasonable* salary through payroll before taking distributions. Paying an implausibly low salary is a known audit trigger.
- C-Corp — you are an employee if you work there, and you are paid through payroll.
The contracts worth having
- Master services agreement with each recurring client — payment terms, liability caps, termination.
- Statement of work per engagement, defining scope. This is what prevents scope disputes.
- Contractor agreement with an explicit IP assignment. Without it, whoever wrote the code may own it.
- Mutual NDA where genuinely needed. Not for every conversation.
- Operating agreement — see formation.
Legal counsel
Contract templates reviewed for your situation, and someone to call before you sign something unusual rather than after.
See what's includedWhere to go next
Bookkeeping covers recording all of this properly. If you are heading toward a raise or a sale, scale covers what diligence will look for.
Frequently asked questions
- Can I just pay everyone as a contractor?
- Only if they genuinely are contractors. Classification depends on the degree of control the company exercises over how, when and where the work is done — not on what the agreement is called. A full-time worker following your schedule using your systems is likely an employee regardless of the paperwork, and misclassification exposes you to back taxes and penalties.
- Do I need to issue a 1099 to an overseas contractor?
- Generally no. Form 1099-NEC applies to US persons. For a non-US contractor performing work outside the United States you would normally collect a Form W-8BEN or W-8BEN-E instead, and no 1099 is issued. Collect the form before you pay, not at year end.
- What is an employer of record?
- A company that legally employs someone in their country on your behalf, handling local payroll, taxes and statutory benefits. It lets you hire in a country where you have no entity. It costs meaningfully more than paying a contractor but removes misclassification and permanent-establishment risk.
- How do I pay myself from my own LLC?
- If the LLC is disregarded or taxed as a partnership, you take owner's draws rather than a salary, and tax is handled on your personal return. If it has elected S-Corp treatment, you must pay yourself a reasonable salary through payroll before taking distributions. Record every transfer as it happens.
Topics in this guide
- Contractor or employee? The classification test that decides itWriting "independent contractor" at the top of an agreement has no effect on classification. Substance decides it, and getting it wrong is expensive.
- Paying yourself from your own companyHow you pay yourself depends entirely on how the entity is taxed. Getting the mechanics wrong creates tax problems that are tedious to unwind.
- Hiring internationally: contractor, EOR or your own entityPaying an overseas contractor is easy right up until the point their country decides they were an employee, or that you now have a taxable presence there.
Sources
- IRS — Independent contractor or employee
- IRS — About Form 1099-NEC
- IRS — About Form W-9
- IRS — About Form W-8BEN
- Department of Labor — Misclassification
Last reviewed . Fees, deadlines and government processing times change — verify against the primary source before acting.
Founders 8 tracks obligations and deadlines for your reference. It does not provide legal or tax advice — filings are prepared and reviewed by qualified partners.