What forms do you need to hire an independent contractor?

October 23, 2023
What forms do you need to hire an independent contractor?

Businesses often need to hire independent contractors (ICs) to perform work that their regular employees don't have the time or skills for. In this article, we'll review the tax forms and other documents companies must prepare for ICs. We'll also highlight two best practices for the use of written contracts and tracking of invoices.

If it’s your first-time hiring contractors, be aware that the Internal Revenue Service is aggressive in pursuing abuses of the tax system. So, you must take pains to determine whether an individual is a legitimate contractor or an employee. The difference is crucial, because misclassification and failure to file the right 1099 form for contractors could result in significant fines and penalties.

What paperwork do I need for a 1099 employee?

The IRS looks at three categories when it assesses the degree of control and independence of workers.

  • Behavior. Does the company control or have the right to control what the worker does and how the worker does his or her job?
  • Financial. Does the company control the business aspects of the worker’s job? (This involves how a. worker is paid, whether expenses are reimbursed, who provides tools and supplies, and similar matters.)
  • Type of working relationship. Are there written contracts or employee type benefits, such as a pension plan, insurance, and vacation pay? Will the relationship continue? Is the work performed a key aspect of the business?

If you determine that the worker is not an employee, you need to use some basic independent contractor forms.

Form W-9

The IRS requires contractors to fill out a Form W-9, a request for a Taxpayer Identification Number and Certification, which you should keep on file for at least four years after the hiring. This form is used to request the correct name and Taxpayer Identification Number, or TIN, of the worker or their entity. A TIN may be either a Social Security Number (SSN), or an Employer Identification Number (EIN). Make sure the contractor checks the box exempting him from tax withholding. As a separate business entity, the IC should file his or her own self-employment taxes. TriNet preps and stores this document for companies that hire and pay contractors through our platform.

Form 1099-NEC

With limited exceptions, if you pay an IC $600 or more for services provided during the year, you must fill out and file a Form 1099-NEC, Nonemployee Compensation. Before the 2020 tax year, this type of payment was reported as part of the Form 1099-MISC. You use this independent contractor form to report payments made during the tax year. You must provide each IC with a copy of their 1099-NEC by January 31 of the year in which you made the payment.

A Written Contract

A contract, ideally prepared by an attorney, should outline the project, its expected results, the project fee and dates for deliverables. The contract should also specify:

  • The client will not pay or withhold taxes or benefits contributions.
  • The IC will use his or her own tools, equipment and skills to carry out the project.
  • The client may terminate the contract if the IC’s work is substandard, or he violates the terms of the agreement.

Red flags arise when one company client repeatedly hires the same IC. It might look like the contractor actually is an employee. Do help avoid this appearance and stay tax compliant, create a fresh contract for each new project.

Tracking Invoices

Only make payments against submitted invoices. Do not accept expense reports as part of your contractor paperwork. Equipment, mileage and similar items form part of the IC’s business expenses, not yours. Keep all invoices on file, and make sure they coordinate with Form 1099-NEC.

Finding the Right Form for Independent Contractors

If you are not sure whether the individual is an employee or an independent contractor, the IRS, U.S. Department of Labor, your State Compensation Board, your State Workers’ Compensation Insurance Agency, and your State Department of Labor provide guidelines on how to make the call. If, after reviewing the information, you are still not sure whether a worker is an employee or an IC, file Form SS-8 with the IRS. The IRS will review the evidence and officially determine the worker’s status. This is especially useful for businesses that repeatedly buy the same type of services.

Helpful Link:

Forms and Taxes for Independent Contractors

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