So you want to hire an independent contractor? When it comes to payroll, that worker classification refers to the temporary help you hire for your business. For your cash flow, bringing on a contingency workforce rather than part-time or full-time employees may be the best approach. But as a small business owner, it’s important to know how to pay 1099 workers and how to report those contractor payments to the Internal Revenue Service (IRS).
Not sure if you are hiring a contractor or employee? Check the IRS regulations. (This is important, because if there is a misclassification of someone as a contractor when they should’ve been classified as a W-2 employee, then the company or the worker can submit Form SS-8 for a determination. If you made an error, you could owe unpaid wages and taxes. This has issue has come up a lot in the news because of the gig economy.) Once you are sure you are bringing on a contractor (including freelancers), follow the steps below.
Quick Links
1. Have your contractor fill out a Form W-9
This will provide you with all their identifying info. Make sure to keep the IRS Form W-9 in your bookkeeping records for at least four years, and pay close attention to the business classification (i.e. sole proprietorship, S corp, etc.), which will appear in box 3 at the top of the form. This will help you to determine whether or not you need to file a 1099-NEC form 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 nonemployee compensation for the tax year. (The TIN can be a Social Security Number or an Employer Identification Number.) Failure to pay backup withholding can leave you responsible for any uncollected tax liability, so it’s important to get it right. The Internal Revenue Service (IRS) will collect self-employment taxes (i.e., Social Security taxes and Medicare taxes) one way or another!
2. Get them the money
When you’re paying independent contractors, you’re generally not withholding taxes before you give them the money and they’re not receiving employee benefits such as health insurance. They take care of their own taxes before and during tax return time. However, based on the number of hours you’re using the contractors (especially if the have a retainer with you for an ongoing period of time) and other factors related to following labor laws, you may choose to use a staffing agency that is hiring and paying contractors on W-2s and handling payroll taxes.
Some employers choose to write their contractors checks, while others get permission to pay contractors via direct deposit (note: authorization forms are required!), and some use websites like PayPal to electronically transfer the funds. Many payroll services 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. (Form 1099-MISC is no longer used for this.) Regarding payment method, 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 tax form 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.
Business owners need to send Copy A of 1099-NEC forms to the IRS and Copy B to contractors 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 US Returns. To file electronically, you’ll need a Transmitter Control Code (TCC), and follow the latest IRS instructions and deadlines for how to do this.
You may also need to send the 1099-NEC to your state, the state where your contractor works and/or resides. Be sure to check with your CPA to ensure your small business is compliant with state and local laws.
How to use Gusto to pay independent contractors FAQs
Can I use Gusto to pay independent contractors?
Yes, in addition to your full- and part- time employees, you can also pay contractors through Gusto. We also automatically file your required new hire reporting for you, and generate, file and deliver 1099-MISC forms at the end of the year at no extra cost. Gusto allows you to track and report all of your contractor payments in one place, so you can spend more time focusing on running your business. Learn more about paying contractors.
How much does it cost to pay independent contractors with Gusto?
If you have both contractors and employees, you’ll pay the same per-person price for contractors but only for the months they’re paid. We will automatically generate and file your 1099-MISC forms and email them to your contractors directly. We also have a Contractor Only plan available for businesses without W-2 employees. It costs $35/month plus $6/month per contractor. Learn more about paying contractors.
What do I need to pay a 1099 contractor with Gusto?
For as low as $6/month you can get started with Gusto, to easily pay contractors with no setup fees, no hidden fees, and no extra charges for 1099s or filing forms. If you’re setting up payroll for the first time, we suggest reading our list of everything you need to know. If you already have payroll through a different service, check out our guide to switching.
