Hiring an independent contractor: what forms do I need?

February 1, 2017
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State Income Taxes: Calculating Payroll - Money Matters

In my last blog post, I wrote about the important first step of determining a worker’s status. Once you’ve hired an independent contractor, there are some important considerations to ensure your payroll processes are up-to-date. Here are some important independent contractor forms that businesses should have on file: 

Form W-9

Form W-9, the Request for Taxpayer Identification Number and Certification, is required to be completed by all contractors. It is used to obtain the correct name and Taxpayer Identification Number (TIN) of the worker or their entity. A TIN may be either a Social Security Number (SSN), or an Employer Identification Number (EIN). This form should be kept on file for at least four years after hiring the individual.

The box exempting the contractor from tax withholding should be marked. The independent contractor needs to file his or her own self-employment taxes since they are part of a different business entity.

New worker: employee or independent contractor? Our blog breaks down the difference for businesses.

A Written Contract

A contract, preferably written by an attorney, should outline the project and its expected results, the project fee, and dates for deliverables. It should specify that the client will not pay or withhold taxes or benefits contributions. It should mention that the independent contractor will use his or her own tools and equipment on the project.

Additionally, a clause mentioning that the client can terminate the contract if the work is substandard, or if the terms of the agreement are violated, should be included. Make sure that a different contract is created for each new project. If you continually hire the same independent contractor, the IRS may question whether the worker is truly a contractor.

Invoices

Payments to contractors should only be made on the contractor’s invoices. Do not accept expense reports. Equipment, tools, mileage, etc. are the contractor’s business expenses, separate from your business. Make sure the invoices correspond to the Form 1099-MISC.

Form 1099-MISC

If you pay an independent contractor $600 or more (with limited exceptions) for services provided throughout the year, you must provide a Form 1099-MISC. The 1099 should be sent by January 31. If the form is provided electronically, your business needs to deliver the email to the recipient informing them that their form is ready.

Form SS-8?

What if you’re still unsure of a worker’s status? The IRS, the U.S. Department of Labor, your State Compensation Board, your State Workers’ Compensation Insurance Agency, and your State Department of Labor provide independent contractor guidelines for this decision.

If you’re still unsure how to classify the worker, you can file Form SS-8 with the IRS. The IRS will review the evidence and determine the worker’s official status. This process is especially useful for businesses that frequently use the same type of tasks from workers.

It is essential to properly classify workers. Once a worker is classified as an independent contractor, make sure you have the above documents on file. Doing so is good policy and may prevent IRS penalties and fines.

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About

Matthew Keller is a Senior Payroll Specialist at Zenefits who authors our "Money Matters" column. With 20+ years of experience in payroll and accounting, Matt wants to help customers navigate frequent law changes, taxes, and more.

Category: Payroll, Zenefits, Money Matters With Matt


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