March 5, 2021

How Do I Pay a 1099 Independent Contractor?

How Do I Pay a 1099 Independent Contractor?

In today’s post-COVID world, many small businesses are starting to see the value in using independently contracted workers rather than hiring new employees to cut down on costs.

There are a lot of benefits that come with using independent contractors, including

What Forms Do I Need? 

As a small business owner, it’s important to have any independent contractor complete a W-9 form. It is filled out and signed by the independent contractor and given to the employer. 

Because an independent contractor is considered self-employed, they are responsible for their own taxes. 

At the end of the tax year, companies send the W-9 form to the IRS and state government and receive a 1099-NEC form to give to the independent contractor for their own tax filing. 

Another form you may want to consider is a contract. The point of a contract safeguards intellectual property and may have a work-for-hire clause. Additionally, it will stipulate the job requirements, payment, and timeframe for when the job is to be completed.  

How to Pay an Independent Contractor? 

The process for paying an independent contractor is relatively simple. You can decide if you want to pay by the hour or by the job, whichever is preferable and agreeable to both parties. If you’re paying an independent contractor that will work on projects each month, you may want to set up a retainer payment, which is a flat fee you pay every month. 

How you pay is up to you. If you conduct your small business payroll, you can pay by check that way. If you outsource HR, they can set up your independent contractor within their system. 

In addition to paying by check, it’s also acceptable to make payments using a payroll tool, direct deposit, PayPal, wire transfer, etc.   

What Taxes Do I Pay? 

As a business owner, you are not obligated to pay taxes for an independent contractor in most cases. The reason for this is that independent contractors are considered self-employed. Therefore, they are a business or service partner who works contractually with your company and does not receive tax withholdings. 

The only time an employer may have to withhold taxes for an independent contractor is if their Social Security Number or Individual Taxpayer ID number is missing or incorrect. In this instance, the IRS will send you a backup withholding notice. You don’t have to do anything until you receive this notice. 

Once you receive the notice, follow the instructions and withhold taxes at a rate of 24%. At the end of every tax year, you’ll have to send a report to the IRS stipulating the amounts you have withheld from an independent contractor, using IRS Form 945.

What Tax Forms Do I Need to Submit? 

As stated above, you’ll want to have any independent contractor sign a W-9 form when they begin working with your company. You’ll submit the W-9 Form to the IRS and state government.  The information on this form will help you receive a 1099-NEC from the IRS. 

Once you receive this form, you’ll provide it to the independent contractor to file their taxes. Another thing to bear in mind is if an independent contractor is paid less than $600 for the tax year for services they have completed for you, they don’t need a 1099-NEC form.

In the event you need to withhold taxes for an independent contractor, again, you’ll use Form 945. 

What Do I Need From the Independent Contractor? 

When you enter into an agreement with an independent contractor, you’ll want to have them complete and sign a W-9 Form for tax purposes at the end of the year. You’ll submit this information to receive a 1099-NEC Form from the IRS. 

It’s important to obtain a resume or portfolio of the independent contractor’s former work in any business agreement. You may also consider a background check, especially if you’re working with sensitive material matter. Additionally, you may want to see testimonials from former clients they have worked for in the past. 

Disclaimer: Any articles written on this website, including this article, are not to be taken as legal or HR advice. Employment laws are constantly changing and vary by location and industry. You should consult a lawyer or HR expert for guidance. Need HR advice? We can help! 

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