Many industry experts claim that independent contractors will soon make up most of the American workforce within the next decade. Consequently, this shift compels company owners to rethink their business model if their existing employee skillsets aren’t enough to tackle a project or if workloads increase. However, since processing the 1099 payroll isn’t a walk in the park, most employers need more information on how to pay independent contractors.
The entire process starts with proper documentation. It’s important to note that the IRS strictly imposes tax rules and guidelines to prevent system abuses. For this reason, company owners should first determine whether a worker is a genuine contractor or an employee. Failing to establish this distinction may lead to hefty penalties.
Paperwork Checklist for Hiring Independent Contractors
IRS Form W-9 is a tax document that companies use to gather tax information from independent contractors. This information includes the contractor’s name or the name of their business, address, the identification number for taxpayers, and the employee identification number. The firm should require contractors to fill out and submit this form upon engaging them.
Employers should collect the accomplished forms as soon as the independent contractor begins working for the company. If there are changes to the information the contractor initially provided, employers must require them to file a revised Form W-9. The updated details on the revised form are needed to submit the 1099-NEC and other documents.
Forms W-8BEN and W-8BEN-E
The IRS Form W-8BEN serves as a W-9 for foreign independent contractors. In other words, companies hiring foreign contractors must use Form W-8BEN to obtain tax-related information to confirm that the employee isn’t a US citizen and works overseas. However, employers must use IRS Form W-8BEN-E to gather tax information from overseas companies.
The Form 1099-NEC allows the IRS to estimate the contractors’ and freelancers’ taxable income. Companies use this form to document payments made to contractors throughout a tax year. It also includes information on any tax withholding and the amount and reason for withholding.
While the IRS-Form SS-8 isn’t a required document, it helps companies determine if they’re at risk of misclassifying their employees. Misclassifying individuals entails significant consequences. For this reason, companies should avoid worker misrepresentation by using government-provided standards, such as DOL’s ABC test.
Independent Contractor Agreement
The independent contractor agreement is a formal agreement between a company and a 1099 independent contractor. Besides outlining the scope of work, ownership of stated work, and timeframes, this document lays out the compensation, payment conditions, and other vital elements of the partnership such as commercial insurance requirements.
It is recommended the company and contractor sign a confidentiality or non-disclosure agreement. This agreement prohibits both parties from disclosing confidential company information to outside parties.
A non-competition agreement prohibits the independent contractor from competing in the same field as the customer while working with the company, usually for a specific period after the non-compete contract expires. It’s worth noting that some states don’t permit non-compete agreements because they can reduce earnings.
A non-solicitation agreement prohibits an independent contractor from taking any of the employer’s clients. Some companies use non-solicitation contracts to replace the non-compete clause.
Processing the 1099 Payroll Is Not an Easy Undertaking!
While engaging an independent contractor isn’t easy, it becomes considerably more complicated when it comes to filing taxes. For this reason, outsourcing your company’s 1099 payroll process gives you peace of mind regarding tax and documentation compliance.
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