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. It’s important to know how to pay 1099 contractors and how to report those payments to the IRS.
Not sure if you are hiring a contractor or employee? Check the IRS regulations first. Once you are sure you are bringing on a contractor, follow the steps below.
1. Have your contractor fill out a Form W-9
This will provide you with all their identifying info. Make sure to keep the Form W-9 in your records for at least four years, and pay close attention to the business classification (i.e. sole proprietorship, S corp, etc.), which will appear on #3 at the top of the form. This will help you to determine whether or not you need to file a 1099-NEC in January. Also, be sure to check 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.
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-NEC
If you pay an independent contractor more than $600 in the year and their business entity is not an S corp or a C corp, then you must file Form 1099-NEC. (The exception to this rule is if you paid via credit card or a third party payment platform, like Paypal. In that case, the payment settlement entity may be required to issue a 1099-K if certain thresholds are met.) If you withheld any federal income tax, you’ll report the backup withholding amount in Box 4 of the 1099-NEC.
You will need to provide Copy A of the 1099-NEC to the IRS and Copy B to your contractor by January 31—or the following Monday if January 31 falls on a weekend.
If you’ll be sending your 1099-NEC to the IRS via post, be sure to include the required cover sheet, Form 1096: Annual Summary and Transmittal of U.S. Returns. To file electronically, you’ll need a Transmitter Control Code (TCC). If you don’t have one yet, you can request a TCC via Form 4419 by November 1 of the year before your return is due. Once you have your TCC, you can use the IRS FIRE system to file your 1099-NEC electronically. You’ll send Copy B to your contractor via post or, if you have their consent in writing, you can email it to them. There’s a correct way to get consent, and the IRS offers straightforward instructions on their website. Be sure to check out those requirements before emailing any 1099s.
You may also need to send the 1099-NEC to your state, the state where your contractor resides, and/or the state where your contractor worked. Be sure to check with your CPA to ensure compliance with state and local laws.
This post was originally published on September 23, 2017.
