Part of the appeal of hiring independent contractors at a small business is that they don't come with as much hiring paperwork as employees. But this fact doesn't absolve you of the responsibility of filling out and filing the necessary tax forms for these types of workers.
Read on to learn about the required, and optional, tax forms for independent contractors.
Before determining which tax forms you need when hiring independent contractors, you'll have to determine whether or not the worker you hired meets the definition of being an independent contractor.
The misclassification of workers at the time of hire may put you on the hook for paying employment taxes for that worker down the line. So, it's crucial to get it right the first time.
According to the IRS, what distinguishes independent contractors from employees is that businesses can generally control only the results of an independent contractor's work but not what will be done and how it will be done. However, you must exercise sound judgment when classifying workers and thereby in distinguishing whether a worker is an employee versus an independent contractor.
If, after reviewing the IRS guidelines about worker classification, you still aren't sure about how to classify a worker, you can optionally fill out and return Form SS-8 ("Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding") to the IRS. The IRS will give you a definitive answer as to the worker's status.
Businesses must have independent contractors complete Form W-9 ("Request for Taxpayer Identification Number and Certification") before beginning work. The document is essentially the equivalent of Form W-4 but for independent contractors. The document confirms the contractor's name, address and taxpayer identification number in the form of either a Social Security Number (SSN) or an Employee Identification Number (EIN). This information is needed for a business to fill out and issue Form 1099-MISC.
Rather than send the completed Form W-9 to the IRS, you will need to keep the completed form on hand for at least four years should questions arise from the IRS about the independent contractor. Having Form W-9 on hand conveys that you won't be withholding payroll taxes for this contractor as you would for an employee. Consequently, the relevant dues on contractor earnings will come from the contractor himself.
If the incorrect information submitted on Form W-9 results in the erroneous information provided on Form 1099-MISC, the IRS may notify you to contact the contractor to request the corrected specifics. If the contractor does not respond, this may force you to start backup withholding from payments to the independent contractor.
For this reason, it's important to promptly obtain a correct Form W-9 from all independent contractors you hire and then store the form in a location where it will be easily accessible should you need to reference it in the future.
Do you plan to pay your newly hired independent contractor $600 or more for his or her services, rents or other income payments? If so, you must fill out Form 1099-MISC ("Miscellaneous Income") with the total amount you paid him or her during the year and the contractor information you obtained from Form W-9. Then, you will need to supply a duplicate of the completed form to the contractor and another copy to the IRS by January 31 of the year following payment.
Keep in mind that the IRS indicates certain types of payments do not need reporting on Form 1099-MISC. For example, you may not need to include payments to a corporation (including a limited liability company (LLC) treated as a C or S corporation or payments to tax-exempt organizations. You can find the full list of these exceptions in the "Specific Instructions, Exceptions" section of Instructions for Form 1099-MISC.