If I only pay independent contractors, should I to apply for a state identification number and contribute to my state's workers' compensation insurance fund?

Because rules on identification numbers and workers' compensation vary from state to state, you'll need to check with your specific local laws to determine your answer.

1099 Defined

1099 refers to a series of IRS documents known as information forms. While there are a number of different 1099s, Form 1099-MISC, pertains to [independent contractors, and usually, the term 1099 is synonymous with independent contractors.

Independent contractors don't have taxes withheld from their paychecks and aren't technically employees at a company.

State Payroll Taxes

When forming your business, one of the many things you need to do is register with your state and apply for a state identification number, which is used to report and pay state payroll taxes. States vary on what they call this number, who needs it, and the ways you get it.

For example, Oregon refers to their identification number as a Business Identification Number (BIN). You need to obtain a BIN if you're one of the following:

• an in-state or out-of-state employer with employees working in Oregon OR
• a corporation without employees (the BIN is necessary for reporting compensation paid to corporate officers)

If you're a sole proprietor or Limited Liability Coverage (LLC) without any employees, you don't need a BIN. If you're an LLC filing with the IRS as a corporation, you do need a BIN.

If you have only independent contractors and aren't a corporation, you don't need a BIN. The purpose of the BIN is to report and pay employees' payroll taxes and, since independent contractors aren't employees, a BIN isn't needed.

Workers' Compensation Insurance

Generally, workers' compensation is handled on the state level, and much like state payroll taxes, regulations vary from state to state.

For example, Oregon refers to their workers' compensation program as the Workers' Benefit Fund (WBF). The WBF is generally only for people who are, or should be, legally covered by workers' comp in the state of Oregon. Independent contractors, by state law, aren't eligible for workers' comp, so if you only had independent contractors, you wouldn't have to contribute to the WBF.

Final Tip

The differences between independent contractors and employees often get muddled. Check out this blog post to make sure that your independent contractors are actually independent contractors, not employees in disguise.