Paying an Independent Contractor

Paying an independent contractor is different from paying an employee. This article looks at issues of payments, contracts, and taxes for contract workers .

What is an autonomous contractile organ ?

An freelancer contractile organ is an mugwump business owner who does work for a company on a compress footing. mugwump contractors include people who offer services to the general populace.

The general predominate is that person is an mugwump contractor if the payer of this person has the justly to control and direct only the solution of the influence done and not how it will be done. For exercise, if your occupation hires an freelancer contractor to install a modern radio receiver network at your placement, you ca n’t tell them how to do the installation. 

freelancer contractors are considered freelance, and they must pay self-employment tax ( Social Security/Medicare tax ) on their self-employment earnings. The IRS has several ways to distinguish a worker as an independent contractor or employee, based on the sum of control over the work and the time of the proletarian. The type of work being done besides has an consequence on whether the proletarian is an employee or an freelancer contractor ; for example, a salesperson might be either. The IRS looks at the cosmopolitan categories of behavioral command, fiscal control, and the nature of the relationship. 

Some states have extra, more detail, tests for determining independent contractor condition. For example, California has an ABC test stating that the worker is an freelancer contractor only if all three of these conditions are met :

  1. The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
  2. The worker performs work that is outside the usual course of the hiring entity’s business.
  3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed. 

Federal and submit regulations assume that a actor is an employee unless it ‘s prove otherwise. Regulators review cases and make determinations on a individual basis.

Before You Hire Your first Independent contractor

Before you begin paying an independent contractor, you will need respective documents :

An Employer ID Number (EIN), which is like to a Social Security Number for a business, is required for most businesses even if you have no employees. You can apply for and get an EIN number on-line through the IRS .

A W-9 Form (Request for Taxpayer Identification Number and Certification ) signed by the actor. This shape identifies the contractile organ ( with a taxpayer identification numeral ) and provides other information necessity for completing the payments and submitting them to the IRS .

An application or resume/CV from the prospective contractor and

A written contract that i ncludes terms of requital .

For projects, you might want a written proposal outlining the work to be done .

Options for Paying an Independent contractor

An freelancer contractor receives compensation in one of several methods, depending on the agreement set up between your company and the contractor :

  • Hourly. Some contractors get paid on an hourly basis; for example, a computer programmer might get paid for hours worked on programming tasks.
  • By the Job. The other payment alternative is to pay for the work done or by the job. For example, a cleaning service might get paid a set amount for cleaning your office.

A verbal condense is good american samoa valid as a written contract, but it ‘s always better to get the details of the give in publish, to avoid miscommunication and difficulty proving a case in a lawsuit .
State laws determine when a abridge must be in writing. One prerequisite that might apply to you is that a narrow that extends over a year must be written not verbal.

Including extra Terms in a Payment Agreement

In accession to describing the give type and sum, some other significant terms should be included in a requital agreement or written sign for an autonomous contractor .

  • What form of payment (fee or hourly)?
  • How often is payment due? 
  • What’s the amount?
  • Is there a minimum amount? Are there times when additional payments need to be made?
  • What are the “measureables” or milestones for payment? For example, a “by the job” pay agreement often includes specific deadlines for parts of the project. When the deadline is met, a specific amount of pay is released. 
  • What reports are due and when?
  • Are subcontractors allowed (people who work for the contractor)?
  • What if the work isn’t done on time? 
  • What if payments are not made on time? 
  • What if the work isn’t acceptable? 

These payment terms are just a important as the payment come, and they should be decided before the person begins make .

withhold and Deductions from Contractor Pay

In most cases, you do n’t need to withhold Social Security/Medicare tax ( called SECA tax ) or federal or submit income tax from payments to an autonomous contractile organ. The contractor is creditworthy for paying his or her own income taxes and self-employment taxes .

Withholding under Backup Withholding Regulations

As mentioned above, you need a W-9 form for the autonomous contractor before influence begins. In some cases, the taxpayer ID on that form may be wrong or missing. In those cases, you may be directed by the IRS to withhold federal income tax from that person ‘s payments. This is called backing withhold .

You must withhold federal taxes at the backup withholding rate of 24 %. Just as with an employee, take the crying payment to the person and multiply it by .24 to get the tax. 

You will receive a backing withholding detect from the IRS when backup withholding is due. Follow the requirements precisely as directed. If you must withhold taxes from an independent contractile organ under a stand-in holding arrange, you must besides pay these taxes to the IRS at regular intervals. Backup withhold must be reported to the IRS on Form 945, Annual Return of Withheld Federal Income Tax. form 945 is due January 31, for the previous tax year.

Reporting Payments to Independent Contractors

Each year you must report payments to any contract worker if you paid that person $ 600 or more during the year. Beginning in 2020, you must use a 1099-NEC form for this report. It ‘s due at the end of January of the year after the tax year. A10099-NEC for 2020 is due January 31, 2021. 

If you are confused about reporting payments for independent contractors, see this article about Who Must Receive a 1099-NEC .

reference :
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