Updated: September 2018.
A 1099 employee technically doesn’t exist—it’s just another term for independent contractors.
Contractors can often add just the extra burst of talent and speed you’re looking for. Like employees, however, independent contractors also come with a small pile of paperwork.
Once you’ve found the perfect freelancer for your project, don’t let the dizzying array of forms and documents knock you off course! Now you should always ask your CPA for a full compliance checklist, but here’s a look at some of the requirements and best practices you should keep in mind as you bring the new contractor onboard.
First up: Get your tax forms in order.
You’ll need two documents when tax time rolls around: Form W-9 and the 1099-MISC form. We’ve included links to the appropriate documents below, but you should also mosey on over to IRS.gov to make sure you have the latest versions.
Step 1: Ask your independent contractor to fill out Form W-9.
When tax time rolls around, Form Form W-9 will be your best friend. You don’t need to send it anywhere, but you are required to keep it on file for a minimum of four years. Ask them to complete this form on Day 1, so you aren’t scrambling for it later.
Form W-9 (Request for Taxpayer Identification Number) verifies your freelancer’s name, address, and Taxpayer Identification Number (TIN), so they can’t dodge the IRS. It also helps you confirm that they’re legally allowed to work in the U.S. as a U.S. resident or citizen.
When you review the contractor’s W-9, make sure they remember to exempt themselves from withholding taxes; they should be filing self-employment taxes on their own.
PRO TIP: If your freelancer is an international resident or citizen, collect Form W8-BEN instead.
Step 2: Fill out two 1099-MISC forms.
Mark your calendar, because this form comes with deadlines. In January, look at how much you’ve paid the independent contractor over the past year. If you’ve paid them more than $600 within the past calendar year, you’ll need to complete a 1099-MISC form.
This form reports how much an independent contractor earned while working with you. You’ll both need this information to fill out your taxes, so don’t lose it.
By Jan. 31: Make sure you send the 1099-MISC to the contractor by the last day of January. If that happens to fall on a weekend, you have until the following Monday.
By Feb. 28: You’ll have until the end of February to send a copy of the 1099-MISC to the IRS — or submit it by March 1 if you file your 1099s electronically through the FIRE system.
PRO TIP: Prefer paper? If you file your 1099s by mail, you’ll also need to submit Form 1096, which is a summary of all your 1099 forms. Add one more piece of paper to your pile.
Best practices for keeping your paperwork in order.
Records, records, records. Once you’ve nailed down the tax requirements, there are other habits you should pick up to keep your relationship with the contractor going as smoothly as possible.
As with other business activities, hold on to every single document related to your work with a freelancer: Contracts, invoices, proofs of payment, and more. Here are a few tricks of the trade that will help you stay compliant (and sane).
Ask your independent contractor for invoices.
Only pay your contractor once they’ve sent an invoice your way. Save every invoice for your records. And don’t accept any additional expense reports. Why? Because with great freedom comes great responsibility: Expenses for their business are the responsibility of the freelancer.
Tools to check out:
- Bill.com to pay and process bills
- Harvest for tracking time
- FreshBooks small business accounting with invoicing
Add your freelancer to payroll.
Wait, I know what you’re going to ask: “Can’t adding a freelancer to payroll blur the lines between contractors vs employees?” In some cases, adding them to payroll is OK. Depending on how long your relationship will last, it may be easier — and more efficient — to add them directly to your company’s payroll.
Keep records like a boss.
Keeping records organized gets so much easier if everything is shared and stored electronically. There are dedicated apps for invoices and payroll, but what about other documents like contracts, non-disclosure agreements (NDAs), and other work-related files?
Tools to check out:
- HelloSign, an esignature platform
- DocuSign, another esignature platform
- Google Docs for document sharing and storage
Keeping detailed records is part of being a business owner, but you don’t need to bury yourself under all that paperwork. By keeping track of your “must-dos” and deadlines, and using digital tools to streamline processes as much as possible, you can stay on top of all the requirements without a lot of extra time and effort.