Paying Independent Contractors

Recently I wrote a blog about hiring independent contractors, so this time I would like to share information about paying them. It is important to remember that an independent contractor is a worker who does not work for your company, but is on a contract basis instead. Make sure you have correctly classified your worker before considering paying them as an independent contractor. As mentioned in the blog Hiring Independent Contractors, if your business is audited by the IRS and mistakes are found, you may be fined and subject to penalties.

Compared to paying regular employees, paying independent contractors is simple. One of the reasons is that businesses do not withhold income tax or pay Medicare or Social Security taxes for independent contractors, as they do for regular employees. The most common methods of paying  independent contractors are hourly and by the job. This, as well as the rate of pay, should be mentioned in the contract.

The following are forms you may have to file with the IRS when paying an independent contractor.

From SS-8

If for any reason you do not know the worker’s status, you can ask the IRS for a determination letter. Form SS-8 is used to clarify whether a worker is an employee, or an independent contractor. The employer provides known information about the worker by filling out the form, and in return, the IRS will send the employer a letter giving their opinion on the status of the worker.  

Form W-9

Before you hire an independent contractor, you must have a Form W-9 signed by the worker. This form can be used to request the correct name and Taxpayer Identification Number, or TIN. A TIN may be either a Social Security Number or an Employer Identification Number. Submitting this form certifies that the information you are providing is accurate, be sure to keep these on file for at least 4 years for future reference and in case your business is audited by the IRS.

Form 1099-MISC

Before an independent contractor can receive this form, they must first have completed a W-9 Form. If you pay independent contractors, you may have to file Form 1099-MISC. When a business pays an independent contractor $600 or more over the course of a tax year, the IRS requires the payments to be reported on this form. Form 1099-MISC must be prepared, given to workers, and submitted to the IRS early in the year since it is an annual wage report form. Some instances where this form may be needed are when there is income earned by an independent contractor, if there are any fees or commissions that were paid, if there was any payment for prizes, awards, or legal services, or if there were any medical payments made.
Like mentioned before, no federal or state income tax is withheld from the pay of an independent contractor, but there may be some exceptions. For example, if a contractor does not have a TIN or has provided a wrong one, you must enforce backup withholding on their payments, which is withheld at the rate of 28%. Also, every independent contractor is responsible for paying self-employed taxes based on their total income from self-employment each year.