This answer lays out the forms and tax documents that companies prepare for Independent Contractors (ICs).
This answer lays out the forms and tax documents that companies prepare for Independent Contractors (ICs), as well as highlighting two best practices: the use of written contracts and tracking of invoices.
If it’s your first time hiring contractors, be aware that the IRS is aggressive in pursuing abuses of the tax system. So, if a company is unsure whether the individual is a legitimate contractor and not an employee, the first step is figuring that out. The difference is crucial, as misclassification could result in significant fines and penalties.
The IRS requires contractors to fill out a Form W-9, request for Taxpayer Identification Number and Certification, which you should keep on file for at least four years after the hiring. This form is used to request the correct name and Taxpayer Identification Number, or TIN, of the worker or their entity. A TIN may be either a Social Security Number (SSN), or an Employer Identification Number (EIN). Make sure the contractor checks the box exempting him from tax withholding. As a separate business entity, the IC should file his or her own self-employment taxes. Zenefits preps and stores this document for companies that hire and pay contractors through the platform.
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With limited exceptions, if you pay the IC $600 or more for services provided throughout the year, you must provide him or her with Form 1099-MISC. January 31st is usually the due date that your company needs to have sent the 1099 form to its recipient. For e-delivery, a company needs to have delivered the email to the recipient informing them that their form is ready. Zenefits offers the option to prepare and store the 1099-MISC for independent contractors.
A Written Contract
A contract, ideally prepared by an attorney, should outline the project and its expected results, the project fee and dates for deliverables. The contract should also specify:
- The client will not pay or withhold taxes or benefits contributions,
- The IC will use his or her own skills and equipment to carry out the project, and
- The client may terminate the contract if the IC’s work is substandard, or he violates the terms of the agreement.
Red flags arise when a client repeatedly hires the same IC. Make sure you create a fresh contract for each new project. Zenefits offers its clients a template agreement prepared by Orrick.
Only make payments against submitted invoices. Do not accept expense reports. Equipment, mileage and similar items form part of the IC’s business expenses, not yours. Keep all invoices on file, and make sure they coordinate with Form 1099-MISC.
Independent Contractor vs. Employee
If you are not sure whether the individual is an employee or an independent contractor, the IRS, U.S. Department of Labor, your State Compensation Board, your State Workers’ Compensation Insurance Agency, and your State Department of Labor provide guidelines on how to make the call. If, after reviewing the information, you are still not sure whether a worker is an employee or an IC, file [Form SS-8 with the IRS. The IRS will review the evidence and officially determine the worker’s status. This is especially useful for businesses that repeatedly buy the same type of services.