Tax Compliance 101: How to Hire an Independent Contractor
As a small business owner, hiring an independent contractor to alleviate your workload or get support in a niche area that requires special skills can be a game-changer. Brand and website designers, copywriters, and marketing strategists are just some examples of independent experts who can help you take your business to the next level.
Working with an independent freelancer is much easier than hiring a full-time employee, but there are important considerations to keep in mind, especially when it comes to taxes. In this article, we’re going to break down the tax requirements and forms you need to hire an independent contractor.
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What Is an Independent Contractor?
An independent contractor is a self-employed person or business that helps you tackle specific tasks or projects within your company. For example, you can hire a social media manager to improve brand visibility, a graphic designer to revamp your logo, or a bookkeeper to keep your finances up to date.
Independent Contractor vs. Salaried Employee: Biggest Differences
When hiring an independent freelancer, it’s important to understand that they’re not your employee. They’re a contractor providing a specialized service to you on a temporary basis.
You don’t have the same degree of control over how and when they work as you do with a full-time employee. That said, hiring an independent contractor also comes with lower onboarding costs and more flexibility.
The Benefits of Hiring an Independent Contractor
There are many benefits to hiring an independent contractor. In fact, nearly one in five small business owners say they’re more likely to hire a contractor than a salaried employee. Here are some of the reasons for hiring a contractor.
Qualified expertise: Independent contractors are skilled professionals who can provide assistance in specialized areas to grow your business.
Low costs: Hiring a contractor is much cheaper than bringing on a salaried employee because you don’t have to cover expenses like time off, health insurance, or retirement.
Easy tax compliance: You don’t have to pay Social Security or Medicare taxes or withhold taxes because contractors handle their own taxes.
Access to global talent: It’s significantly easier to hire an international contractor than it is to bring on a full-time employee who’s based outside the US. Businesses can hire contractors from around the world, giving them access to a diverse pool of skills and perspectives.
How to Stay in Compliance When Hiring an Independent Contractor
When hiring a contractor, it’s important to comply with legal and tax regulations. Here are the things that small businesses should be aware of.
Classify your independent contractor. Claiming that the person you’re working with is an independent contractor when they are, in fact, an employee can lead to serious consequences. The IRS states that “a business must examine the relationship between it and the worker” to determine worker classification and has extensive guidelines on how to do so.
Determine if you need an EIN. You may need to obtain an EIN (employee identification number) from the IRS to hire an independent contractor. It’s an employer ID number that identifies your business for tax purposes. If you’re a sole proprietor or a single-member limited liability company (LLC), then you don’t need an EIN and can use your social security number instead.
Sign a contract. Even if the job that your independent contractor is doing for you is very simple, it’s always best to have a written contract in place. A contractor agreement should outline important details such as scope of work, payment terms, confidentiality, intellectual property rights, and more.
Tax Forms for Hiring an Independent Contractor
There are two main tax forms when it comes to hiring an independent contractor: Form W-9 and Form 1099-NEC. It’s crucial to collect these forms on time to stay in compliance with the law.
Form W-9
Your independent contractor will need to fill out a Form W-9, which is a tax form used to obtain essential information from independent contractors, freelancers, and other entities.
Your independent contractor will need to provide information like their taxpayer identification number (TIN), which can be either a social security number for individuals or an EIN for businesses. They’ll also need to provide their legal name, address, and other important information.
Typically, independent contractors handle their own taxes and you don’t need to withhold employment taxes. However, if the contractor doesn’t check the box that exempts them from tax withholding, you’re responsible for withholding taxes at 28%. It’s important that the W-9 is complete before you pay your independent contractor.
Form 1099-NEC
Form 1099-NEC is an important form that’s used for independent contractor tax reporting. You need to report payments to the IRS if you paid your independent contractor $600 or more during the year. It’s important to keep track of the payments you make to your contractor.
If you paid your contractor $600 or more during the year, you need to send them Form 1099-NEC by no later than January 31 of the following year and submit it to the IRS. Many business owners have questions about how to hire an independent contractor 1099. It’s not complicated, but it’s important to file the form by the due date.
Note: In the past, the IRS used the Form 1099-MISC to report independent contractor income. This form is now used to report other miscellaneous payments. For independent contractors, you should typically use the Form 1099-NEC.
How to Hire an International Independent Contractor
To hire an independent contractor who’s based internationally or a foreign organization, you need to collect a Form W-8BEN or a Form W-8BEN-E. The Form W-8BEN is used for foreign workers who’re individuals and the Form W-8BEN-E is used for international organizations.
These forms are similar in their nature to the Form W-9 but tailored to international independent contractors.
Final Thoughts: Hiring an Independent Contractor
Hiring an independent contractor can open new opportunities to small business owners. The process also involves significantly less paperwork and resources than hiring a full-time employee. That said, there are still legal and tax requirements to comply with, such as collecting a Form W-9 and filing a Form 1099-NEC with the IRS.
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