An independent contractor (subcontractor) is an individual who offers his services to a business without being an employee of that business. For example, companies often hire consultants on an independent contractor basis for a specific project, with a fixed fee. If you have hired or are considering hiring a subcontractor, it's important to understand 1099 rules and how a subcontractor should be paid.

Payment Threshold

A company is required to file a 1099 form when an independent contractor is paid more than $600 in a given year. A company is required to pay half, at 7.5 percent, of an employee's Social Security tax, but is not similarly obligated for contractors. The independent contractor is responsible for paying all taxes, including Social Security and Medicare taxes.

Control of Behavior

According to IRS Publication 15A, if a company gives instructions to an individual about how to work, when to work and where to work, that person cannot be considered an independent contractor. For example, if the individual is told what people to hire and what tools should be used to perform work, that person cannot be treated as an individual contractor. One example of directing an individual is providing training to him, an activity that does not take place with a non-employee.

From a financial perspective, if an individual has unreimbursed business expenses, has made a financial investment in his business and can realize a profit or loss from his business, his role as an independent contractor can be justified from a tax perspective.

If the relationship of the person and the business continues on an ongoing basis and appears permanent, the worker’s classification as an independent contractor is questionable.

Contractor Agreement

To help assure a company can justify the position of hiring an individual as an independent contractor with the issuance of a 1099, an independent contractor agreement should be prepared and signed by both the contractor and the hiring company. The agreement should state the purpose for which the contractor is engaged, that the agreement is in no way meant to be an employee-hiring arrangement and that the company will not withhold taxes for the contractor.

Read More: Simple Subcontractor Agreement

Entitlement and Termination

The agreement should indicate that the contactor waives any rights to receive benefits such as health care insurance, 401k enrollment, vacation and sick leave. Not clearly stating this could make a company libel for back benefits. An independent contractor agreement should indicate that the company may terminate an agreement with the contractor at any time.