So you want to hire an independent contractor? When it comes to payroll, that classification refers to a type of temporary worker you hire at your business.
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1. Have your contractor fill out a Form W-9
This will provide you with all their identifying info. Make sure to keep the W-9 in your records for at least four years, and pay close attention to whether the independent contractor is subject to backup withholding or not (line 2 under Part II). If the contractor does not supply you with a valid taxpayer identification number (TIN) in Part I, then you will be required to deduct backup withholding from their earnings. Failure to pay backup withholding can leave you responsible for any uncollected tax liability, so it’s important to get it right.
2. Get them the money
When you’re paying independent contractors, you generally don’t take taxes out before you give them the money. Some employers choose to write their contractors checks, while others get permission to pay their contractors via direct deposit (note: authorization forms are required!), and some use websites like PayPal to electronically transfer the funds. Many payroll providers can also process these payments as a convenience, as long as you are already using them to pay your employees.
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3. Pay any backup withholding that you withheld to the IRS
If there were backup withholdings with your contractor, get that money to the IRS. And make sure to get any state taxes that were withheld to the appropriate state taxing authority, too.
4. Fill out a 1099-MISC
If you pay an independent contractor more than $600 in the year, then this is required. You must also file Form 1099-MISC for each independent contractor from whom you have withheld any federal income tax (and report the backup withholding amount in Box 4 of the 1099-MISC). You will need to provide a copy to your contractor by January 31, and generally must send a copy to the IRS and the state income tax withholding agency by January 31 to stay compliant.
For more information, check out the IRS site, and review the General Instructions for Certain Information Returns.