Hiring independent contractors opens doors for specialized talent pools and offers flexibility in managing the workforce. However, the implications of independent contractor taxes can be resource-draining for global employers.
Fortunately, our comprehensive guide on 1099 contractor taxes will share knowledge and tools to confidently manage independent contractors in the US.
Here, we shall discuss official guidelines on worker classification, employer recordkeeping requirements for tax purposes, and filing deadlines. We empower you to stay compliant and avoid costly penalties while managing taxes for an independent contractor.
IRS Guidelines for Taxes as an Independent Contractor
The Internal Revenue Service (IRS) has no definitive set of guidelines for independent contractor taxes. However, they provide a multi-factor test to help businesses determine private contractor taxes.
You may take note of the following points from the IRS perspective to classify and tax independent contractors:
| Criteria |
Employee |
Independent Contractor |
| Employer Control |
You shall determine how, when, and where work is performed. You may provide detailed instructions, set specific schedules, and closely supervise the work. |
The contractor has more autonomy and control over their work methods and schedule. They are typically not subject to direct supervision or specific training. |
| Employer Relationship |
Statutory mandate to extend benefits like health insurance, paid time off, or vacation pay. |
The engagement is typically project-based or short-term, and the contractor doesn't receive employee benefits. |
| Financial Investment |
You must provide the necessary tools and equipment needed to perform their job duties. |
Independent contractors generally supply their tools and equipment for the work they do. |
| Behavioral Control |
You have the right to supervise and train employees, dictate work methods, and provide performance evaluations. |
Their work is typically evaluated based on the outcome rather than specific methods used. |
Click here to determine if your contractor should be treated as an employee for tax purposes.
Working from home avoids commuting, and fewer commuters result in
lower greenhouse gas emissions.
Contractor Taxes: Recordkeeping & Reporting Requirements for Employers
The essential requirements for taxes on independent contractors are discussed below. The same is applicable for subcontractors and taxes.
- Issuing Form W-9 to US Residents
You must obtain a completed Form W-9 from each independent contractor before making payments exceeding $600 in a tax year. This form collects the contractor's Taxpayer Identification Number (TIN), which is essential for accurately reporting taxes on independent contractor income.
Here's a breakdown of what Form W-9 accomplishes:
- The form captures the contractor's legal name, address, and TIN.
- By collecting the TIN, the employer can verify the independent contractor income tax filing status.
- A completed Form W-9 helps avoid the need to withhold backup income tax on independent contractor payments.
- Issuing Form W-8 To Foreign Residents
Form W-8 allows you to verify the foreign resident's tax treaty benefits and withholding rate. Moreover, foreign residents must accurately submit Form W-8 and you must retain a copy of it.
However, failing to obtain a completed Form W-8 may result in you being required to withhold the full 30% tax rate on payments made to the foreign resident, even if they are entitled to a lower individual contractor tax rate.
You may learn more about W8 vs W9 forms to report independent contractor taxes.
- Issuing Form 1099-NEC For Reporting Contractor Tax Payments
Form 1099-NEC serves as an information return used to report payments made to independent contractors during the tax year.
You must file Form 1099-NEC with the IRS for each independent contractor who paid $600 or more in a tax year. This form documents the total compensation paid to the contractor for services rendered.
- Form 1099-K For Contractor Income Through Payment Settlement Entities
The IRS uses Form 1099-K to track income received from payment card transactions and third-party network transactions. This includes transactions processed by:
- Payment processors (PayPal, Venmo, Stripe)
- Gift cards
- Online marketplaces (Etsy, eBay)
Moreover, Form 1099-K is not issued by employers, but by payment settlement entities to report business income from electronic transactions.
- Deadline For 1099 Contractor Taxes
The typical deadline for filing Form 1099-NEC with the IRS is January 31st of the following year. Remember, timely filing of Form 1099-NEC is crucial to avoid penalties for late submissions.
Backup Withholding Rules for Taxation of Independent Contractors
Backup withholding sets aside a portion of income tax on independent contractor income, typically at a rate of 24%, and is intended to ensure that independent contractors are paying their fair share of income taxes.
The IRS may require backup withholding if:
- The contractor fails to furnish a completed Form W-9.
- The contractor has a history of underreporting of paying taxes as an independent contractor.
Employers are responsible for upholding backup withholding regulations. Failure to do so can result in the employer being liable for the independent contractor taxes that should have been withheld.
Do Independent Contractors Pay Taxes?
Here's a breakdown of taxes as independent contractor:
- The current tax rates for independent contractors are 15.3% (12.4% for Social Security and 2.9% for Medicare).
- This tax is applied to independent contractor taxable income (net profit obtained after subtracting business expenses from gross income).
- Independent contractors must make estimated tax payments using Form 1040-ES throughout the year to avoid penalties.
- State and local income taxes may be applicable based on the location of the independent contractor.
Manage Taxes for Independent Contractor with Skuad
Skuad is a global payroll platform and employer-of-record solution that simplifies as follows:
- Classification guidance by establishing a clear policy for classifying workers correctly.
- Onboarding independent contractors through streamlined workflows and collecting contractor information electronically.
- Payments and recordkeeping for tax reporting.
Skuad can help independent contractors invoice clients and get paid in the currency of their choice. Meanwhile, Skuad can automate contractor management for global companies.
Book a demo to get started with Skuad.
FAQs
- What is the IRS tax rate for independent contractors?
The current tax rate for independent contractors is 15.3% self-employment tax (covering Social Security and Medicare) on net earnings. Income deductions are allowed to lower overall taxable income.
- How does a 1099 employee pay taxes?
1099 employees, otherwise independent contractors, are responsible for paying their taxes. They need to make estimated tax payments through Form 1040-ES throughout the year to avoid penalties.
- What is freelance income?
Freelance income is typically based on a project or contract basis for offering any specialized skills. Freelance income over a threshold (currently $600 a year) and received from US entities is subject to taxation.
.png)
.png)
.svg)
