I know, the thought of “Independent Contractors” sounds big & scary and somehow, very official. Don’t worry! It’s so much easier than it looks.For every business, what you outsource will vary. Some will need to hire out big jobs, some small jobs–after all, there is so much to do but so few hours and only one of you. Hiring them as an Independent Contractor means you don’t pay their income taxes or social security benefits. That means they’ll have to take care of that on their own taxes. This is NOT a way to get around hiring employees see this article on what it means to be an employee. We’re trying to avoid doing anything that could later be audited and determined as illegal. This is the good part–all you need are two simple forms. (Crazy right, tax forms and simple–can that even go in a sentence together???) You definitely want to take care of these since they will help you keep everything “on the level” if you will.
Before you start paying them you want to take care of the first form. Just click the link, print & get it completed. You can find the form here: W-9: Request for Taxpayer Identification Form. It is recommended that you do this for anyone you *might* be currently paying under the table-and before you pay them any more.
While we’re focusing on working on making everything good with the IRS, it’s important to note you should probably have a contract with your Independent Contractor to deal with the job including deadlines. We’re working on a section that will deal with contracts for an upcoming feature.
I know you’re an awesome bookkeeper and you’ve been noting how much you’ve been paying them all year long. Here’s the important thing: At the end of the year, if the total amount paid to one individual is more than $600 than you need to fill out a 1099 Miscellaneous Income Form for each individual and provide them with their own copy at the end of the year. (You need their Tax ID, which is why the W-9 form should be collected in advance of payment.) All of the instructions are included within the form and there’s always additional help available directly from the IRS.gov website.
Why is it important to document this pay with the IRS? So that you can legally deduct the income you pay independent contractors, (What is an independent Contractor you ask? Find out HERE ) rather than paying income tax on money you didn’t actually earn! Those dollars are best used somewhere else.
So that’s it-two simple forms (W-9 & 1099 Misc) is all you need to free yourself from stress about the IRS and someone else’s taxes. I know, everyone always makes it sound so difficult but now you know the truth so go and help yourself by getting some help.
*Special thanks to Carol Drake, CPA; and Nate Reynolds for their contributions to this topic.
**Extra Special Thanks to Anne Ruthmann for providing the resources & inspiration for this post!
Just a reminder, please don’t trust this more than your CPA–they’re up on the newest tax codes so they are the first place to check. 🙂