Does your business require staffing flexibility and higher levels of workforce efficiency? You’ll want to hire a self-employed business owner who works on a contract basis. However, it’s worth noting that contractor pay differs from running payroll for your full-time employees regarding tax requirements and labor laws. For this reason, enlisting the help of a trusted agent of record service provider is a smart move.
What You Should Do Before Hiring an Independent Contractor
Assessing the Work to Be Performed
Unlike a full-time employee whose work is integral to your company’s business, a contractor provides ancillary services. Getting this wrong would mean dealing with misclassification ramifications. Unless you’re willing to expose yourself to financial risks from independent contractors being misclassified, you’ll want to assess the work to be performed.
Verify the Business Is Registered
The IRS uses Employer Identification Numbers (EINs), also known as Federal Tax Identification Numbers (FTIN), to identify business entities and track the wages paid to employees and business owners. Unless you register your business, you won’t get a nine-digit tax ID number that you can use to file taxes and prepare other official reports that your company may require. Luckily, the IRS offers a free service that allows you to get your EIN immediately. However, you’ll want to check if your state requires a separate state tax ID to pay state-specific taxes.
Request a Form W-9
The independent contractor should provide you with a completed Form W-9, the Request for Taxpayer Identification Number and Certification. Besides being used to identify the contractor, this document provides the information you need to pay them and submit them to the IRS.
Agree Upon the Terms of the Payment Structure and Amount
Set up a meeting with your contractor so you can negotiate and decide contractor payment terms. While some contractors may prefer that you pay them based on how much time they spend on the job, others want to get paid by the job. Regarding the payment amount, contractors typically come with a number. However, if you’re looking to get a better feel for the going rate, you might want to call other businesses for quotes.
Write Up a Contract
Once you’ve agreed on a payment system, you’ll need to produce a written contract that shows other important details such as the project’s timeline, deadlines for areas of completion, ownership rights, confidentiality agreement, and what happens when their work isn’t acceptable or when you don’t deliver timely payments.
Decide on the Payment Method
Unless you already have a system, you’ll have to decide on the method you want to pay the contractors. Since saving your payment history in your records is crucial, you’ll want to avoid paying them using cash. The best options for paying independent contractors include checks, ACH transfers, credit cards, wire transfers, and online payment systems.
Give a Copy of 1099-NEC to the Contractor
The IRS requires you to use Form 1099-NEC, Nonemployee Compensation, for reporting payments made to the contractor at the end of the year. In other words, this document serves as their proof of income or pay stub. Since the contractor uses Form 1099-NEC to determine how much they owe in taxes, you’ll need to give them a copy. Moreover, you’ll also need to submit a copy to the IRS if you paid the independent contractor more than $600 throughout the year.
Looking for a Trusted Agent of Record Service Provider?
It’s best to consider several factors before deciding exactly how you’ll pay an independent contractor. Since their tax implications for independent contractors differ from full-time employees, you’ll want to ensure accurate information for tax purposes to avoid misclassification. Otherwise, you’ll run the risk of facing significant taxes, penalties, as well as fines.
With ClearPath, you can streamline your entire independent contractor program and mitigate your misclassification risks. Contact us today to make an appointment.