The pandemic saw an incredible rise in the number of self-employed people in the United States. Many of those individuals operate as independent contractors, people or businesses that provide services as non-employees. In general, you can tell someone is an independent contractor if the hiring business only controls the results of their work, not how they perform it
The working relationship between a business or individual and an independent contractor is initiated when both parties sign an independent contractor agreement. This agreement specifies the contractor’s duties, payment, time frame, and other relevant details.
If your business is going to work with independent contractors, it’s essential to understand how to classify these workers and what your responsibilities are. Remember that independent contractors work with your company, not for your company. They aren’t employees. Independent contractors are self-employed and therefore responsible for managing their own taxes.
When you work with independent contractors, your business has different tax obligations compared to taxes for full- and part-time employees.
You generally don’t have to withhold a contractor’s federal, state, and local taxes, which you would withhold for employees. The independent contractors are responsible for paying two main types of contractor taxes themselves:
In rare cases, you may have to withhold taxes for the independent contractor if they report the wrong income on a tax return or provide the wrong taxpayer identification number (TIN). This is called backup withholding. If the scenario arises, you will simply withhold a set percentage of future payments to the contractor and pay it directly to the IRS on their behalf.
Independent contractors are able to deduct some business expenses from their taxable income to lower their contractor tax burdens. Deductible expenses for independent contractors include:
Exact contractor tax obligations will depend on the profitability of the independent contractor’s business, but remember that these taxes fall squarely on the independent contractor. You don’t have to withhold anything or pay any employment taxes when working with independent contractors.
Independent contractors are generally required to estimate and pay their contractor taxes quarterly if they expect to owe $1,000 or more for the year. These payments are due on April 15, June 15, September 15, and January 15 each year.
As the employer, you won’t have any tax obligations on those deadlines. However, you will need to fill out Form 1099-NEC each year to report how much you paid your non-employees, including independent contractors. You’ll also need to provide a copy of the document to each contractor.
To be able to fill out that form, your business should collect a completed Form W-9 with each independent contractor’s legal name and TIN. It’s best to ask for this form as soon as possible so you have that information on record from the outset. The IRS recommends keeping a copy of the form for a minimum of four years.
If your company plans to hire independent contractors, you’ll need a system for hiring, onboarding, and paying them. Managing independent contractors can get complicated, especially if they’re located in different countries. A streamlined contractor product can eliminate many of those headaches.
Be aware that if you ever want to convince a contractor to become a full-time employee at your company, your tax obligations will change. At that point, you will need to withhold taxes for the individual and pay employment tax for employing them.
Oyster’s platform can help make converting contractors into full employees simple and easy. You’ll have access to a team of experts who will facilitate the transition process.
Oyster is a global employment platform designed to enable visionary HR leaders to find, engage, pay, manage, develop, and take care of a thriving distributed workforce. Oyster lets growing companies give valued international team members the experience they deserve, without the usual headaches and expense.
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