Independent contractors provide services for various jobs under minimal supervision and generally provide their own tools and supplies to get the job done. Self-employed laborers also pay their own income and business tax, which means you won’t withhold these items from your payments for services. Depending on how much you pay for contract labor, you may have an obligation to report the worker’s earnings to the Internal Revenue Service at the end of the year, so be sure to keep track of all amounts paid for contract services.
Obtain a signed IRS W-9 form from the worker. The worker uses this form to provide his tax identification number and information on his business structure. You must acquire this form before paying for contract services.
Calculate the worker’s pay. If you and the contractor have agreed on a fixed job rate, pay the amount of the job. In most cases, independent contractors are not paid hourly. Remember – you will not withhold taxes from the payment.
Total contractor earnings at the end of the year. If you paid more than $600 during the year to a contractor, you must issue a 1099 to the worker, and supply a copy of the form to the IRS. In most cases, you do not have to issue a 1099 for any amount paid if your worker indicates his business is a corporation.
Prepare IRS Form 1099-MISC. If you’re required to issue a 1099 to your worker based on the total amount you paid for services during the year, you must supply the form to the contractor by Jan. 31. A copy of the 1099-MISC is due to the IRS by Feb. 28. Generally, you’ll report the amount you paid the worker in Box 7, Nonemployee Compensation.
Be cautious when classifying a worker as an independent contractor. You can be held liable for employment taxes and penalties if the worker is actually a W-2 employee.