Hired a 1099 Contractor? Here’s Your Paperwork Checklist
While you may have heard the term “1099 employee,” it’s a misnomer. A 1099 employee technically doesn’t exist because W-2 employees are a different worker classification than independent contractors who use the 1099 form as self-employed workers.
1099 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 certified public accountant (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 probably need two documents when tax time rolls around: a W-9 and Form 1099-NEC. We’ve included links to the appropriate documents below, but you should also mosey on over to the Internal Revenue Service’s (IRS) website 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 W-9 will be your best friend. (Note: A W-2 form is for traditional employees not contractors, though if you’ve hired a staffing agency for your contingent workforce, it may have short-term workers fill out Form W-2.) You don’t need to send the W-9 anywhere, but you are required to keep it on file for a minimum of four years. Ask your contractor to complete this form on Day 1, so you aren’t scrambling for it later.
Do you pay your contractors with Gusto?
Simply upload your W-9s and we’ll file and mail the 1099s for each contractor.
Form W-9 (Request for Taxpayer Identification Number or TIN) starts easy by verifying your freelancer’s name and address. Next, Box 3 (at the top of the form) will let you know how your contractor’s business is classified. So long as they’re not running an S corp or a C corp and you’re not paying via credit card or a third-party payment platform (like PayPal), then you can plan on filing the IRS Form 1099-NEC in January. (More on that below.)
Moving on: Part I covers their Taxpayer Identification Number—which is simply a Social Security number or an employer identification number (EIN)—so they can’t dodge the IRS during tax return time, which includes paying self-employment taxes (i.e., Social Security taxes and Medicare taxes).
Part II 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 tax withholding; as self-employed individuals, they should be filing income taxes on their own every tax year. We have an entire post dedicated to how to fill out a W-9, which you may want to share with your contractor.
PRO TIP: If your freelancer is an international resident or citizen, collect Form W8-BEN instead.
Step 2: Fill out two 1099-NEC forms (Copy A and B)
Mark your calendar, because this information return comes with a filing deadline. In January, look at how much you’ve paid the independent contractor over the past year. If you’ve paid them more than $600 nonemployee compensation within the past calendar year and their business entity is not an S corp or C corp, you’ll need to file a 1099-NEC form to report payments (Form 1099-MISC is no longer used for this).
Pro tip: If you paid your contractor via credit card or a payment platform (e.g. PayPal), you may not need to file a 1099-NEC. The payment settlement entity may be required to file a 1099-K.
The 1099-NEC reflects how much an independent contractor earned (but not including payments made via credit cards or third-party settlement platforms) while working with you, the payer. Both you and your contractor have tax obligations.
Every 1099-NEC comes with a Copy A and a Copy B. You’ll file Copy A with the IRS and send Copy B to your contractor. Because the 1099-NEC is not part of the Combined Federal/State Filing Program, you may also need to provide a 1099-NEC to your state and/or the state where your contractor resides or works. Check in with your CPA for state tax advice to remain compliant.
The due date is Jan. 31: Make sure you send the 1099-NEC to the IRS and your contractor by the last day of January. If that happens to fall on a weekend, you have until the following Monday.
If you choose to mail your 1099-NEC Copy A to the IRS, be sure to include Form 1096: Annual Summary and Transmittal of U.S. Returns. This is a cover sheet for paper submissions.
To file 1099s with the IRS electronically through the FIRE system, you’ll need a Transmitter Control Code (TCC), which can be requested via Form 4419. It takes time to process paperwork, so don’t delay on that Form 4419. You have to submit it by November 1 of the year before you plan to electronically file your 1099s. Still have questions about electronic filing? IRS Publication 1220 has detailed instructions on how to e-file your 1099s.
To email Copy B to your contractor, you’ll have to get their written consent to deliver the document electronically. Be sure to follow these IRS requirements for consent to electronic delivery before emailing a contractor his/her 1099-NEC. Otherwise, you’ll need to send it via post.
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 working 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 1099 contractor once they’ve sent an invoice your way. Save every invoice for your records. And don’t accept any additional business expense reimbursement 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 freelancers to payroll blur the lines between contractors vs. regular employees?” In some cases, adding them to payroll is OK. Depending on how long the assignments will last, it may be easier—and more efficient—to add them directly to your company’s payroll for direct deposits into their bank accounts.
If there is a misclassification of someone as a contractor, then the company or the worker can submit Form SS-8 to the IRS, which will render a determination on the worker status based on a range of factors, including the written contract, type of relationship, and degree of control over the work. (This distinction between employees and contractors is why the government has looked closely at Uber and Lyft—and the gig economy in general.)
If a type of worker is considered an employee, then federal laws that are administered and enforced by the U.S. Department of Labor (DOL), as well as state laws, must be followed, along with taking out payroll taxes and providing certain protections, such as employee benefits (or unemployment benefits in the event of job loss), at least a minimum wage, overtime pay if eligible, and workers’ compensation if required.
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:
- Dropbox Sign, an electronic signature platform
- DocuSign, another electronic signature platform
- Google Docs for document sharing and storage
Keeping detailed records is part of being a small business owner, but you don’t need to bury yourself under all that tax preparation. By keeping track of your “must-dos” and deadlines, and using your own tools to streamline processes as much as possible, you can stay on top of all the labor law and tax filing requirements without a lot of extra time and effort.