Independent contractors offer your business a lot with their unique skills and expertise, so bringing them in for certain projects can be a huge benefit for your company. But employees and contractors are different when it comes to onboarding with the correct paperwork and filing your business tax returns. Let’s take a look at what documentation you need for your independent contractors:
Required Documentation for Contractors
When you determine whether a person is an employee or a contractor, you must bring them onboard officially. An important part of that process is the completion of required forms. To follow IRS regulations, there are a few forms you need to have ready when hiring a contractor:
- W-9 Form
First, you need your contractor to fill out a W-9 form. The W-9 is a request for a Taxpayer Identification Number (TIN). However, getting someone to sit down and take the time to fill out a form can be a difficult task.
Using a service provider like Tax1099.com, you can collect the W-9 electronically—streamlining the process and saving time and headaches on both sides. With Tax1099.com, you send out an electronic version of the W-9, and your contractor fills the form out on their own time. The key information required from your contractors is their legal name, taxpayer identification number (TIN), address, and entity type. With electronic form completion, you avoid lost or unfinished forms.
To validate the information from your contractor, use the IRS TIN Match service or a third-party service. Making sure you receive the correct TIN will ensure that your contractor is correctly hired. It also helps you avoid costly fines from the IRS later on. Tax1099.com provides a TIN Check service to further streamline the process.
IMPORTANT: Do not pay a contractor until you get the W-9 back AND validate the information on it. Contractors will sometimes balk at providing the information. They might want to avoid the IRS knowing about the payments you make to them. Or they might have security concerns. However, the IRS requires the W-9 to be completed, so neither objection from the contractor is valid. Any security concern about their Social Security Number can be alleviated if they obtain an Employer Identification Number instead.
If you fail to obtain a W-9 and pay someone without the correct TIN and name combination, you, as the employer, will be liable for the 24% backup withholding that is required without this information. If the contractor still refuses to provide the information, you can protect your business by beginning backup withholding at 24% from the first payment.
If you pay a contractor more than $600, you must also fill out a 1099-NEC form, and this form is NEW for the 2020 tax year. This form documents how much an independent contractor earned while working for your company. The deadline to send the 1099-NEC form to the recipient and to the IRS is January 31. If the date is a weekend or holiday, the form is due to the recipient and IRS on the next business day.
When you need to file form 1099-NEC:
- If you’ve made payments of $600 or more to an individual who is not your employee (personal payments are not reportable).
- If the following three conditions are met:
- You made the payment to someone who is not your employee.
- You made the payment for services in the course of your trade or business (including government agencies or non-profit businesses).
- You made the payment to an individual, a partnership, an estate, or, in some cases, a corporation.
The 1099-MISC Form is used to report miscellaneous payments. These are the situations where you need to file a 1099-MISC for an independent contractor:
- If you paid at least $10 for royalties
- If you paid at least $600 for:
- Prizes and awards
- Other income payments
- Medical and health care payments
- Crop insurance proceeds
- Fish (or other aquatic life) purchased from anyone in the business of catching fish
- Payments to an attorney
- If you made direct sales of at least $5,000 of consumer products to a buyer for resale anywhere other than a permanent retail establishment (place of business that remains unmoving for a considerable amount of time and includes places like hotels or grocery stores; opposite of a permanent retail establishment could be a mobile business).
Changes to Non-Employee Compensation for 2020
As we mentioned above, the 1099-NEC Form is new for the 2020 tax year, and reporting non-employee compensation has changed. You must now report using Form 1099-NEC rather than in Form 1099-MISC Box 7. Make sure that you plan accordingly. The 1099-MISC form will still be used. You report vendor payments such as rent, prizes and awards, and gross proceeds payments to an attorney.
Hiring a contractor takes some paperwork and planning, but eForms and guidance make the task much simpler. Tax1099.com streamlines and reduces the effort needed to organize your forms. In addition to electronic W-9s, you can send your information returns electronically to both the contractors and IRS. This adds flexibility. You can make edits and adjustments to entries before the forms are submitted to the IRS. In addition, Tax1099.com handles your separate state filings and sends forms to contractors via USPS as well as email.
To prepare these forms on Tax1099.com, you can integrate with accounting software like BQE Core, bulk upload using an Excel template, or complete each form manually. If you’d like to learn more about how integrating BQE CORE and Tax1099.com for the simplest tax filing process, check out our new eBook, Contractor Hiring Compliance: Navigating the Tax Form Filing Process. Click the link below to download your copy now: