Companies that need work done, including globally expanding companies seeking remote workers, can choose between hiring employees placed on the company’s payroll with benefits and contracting with self-employed independent contractors. Employees are hired and given the benefits mandated by law, along with certain employment law protections such as a minimum wage, overtime, and leave entitlements. Contractors do not receive benefits but receive payments for their services with invoice payments.
A company may prefer to hire contractors instead of employees for several reasons. It may be cheaper for companies to pay contractors without paying a minimum wage and employee benefits. There may be temporary work needed to be done or short projects that don’t justify the costs of hiring employees and the time it takes to onboard and train them if the employment period is short.
Organizations can hire Independent contractors in almost any country in the world, and their invoices are paid in the contractor’s local currency. When workers are appropriately classified and required forms (such as the 1099 form) are completed and sent to the Internal Revenue Service (IRS), hiring independent contractors is easy and effective in getting remote work done locally or overseas. Hiring and paying contractors can be easy with a global payroll service such as Skuad.
What Is a 1099 Tax Form?
A 1099-MISC form must be filed and sent to the IRS for each person in your company. This form is required if you have paid at least $10 in broker payments or royalties instead of tax-exempt interest or dividends. It is also necessary if you have made payments of at least $600 for the following:
- Awards and prizes
- Income payments
- Health care and medical payments
- Crop insurance payments
- Payments to an attorney
- Fishing boat proceeds
- Cash payments for fish
- Cash paid to an individual, partner, or estate
If your company has paid at least $600 in the tax year to an independent contractor, then your company would need to fill in the form and send it out at the end of the tax year to both the IRS and the taxpayer, which in this case would be the independent contractor you hired to complete work for more than $600.
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Who Is An Independent Contractor?
An independent contractor, or freelancer, is a self-employed individual who provides a service and invoices a client for that service. Conversely, an employee is employed by a company and who is on that company’s payroll and may receive benefits. Employees fill out a W-4 form when hired and get a W-2 form at tax time.
There are several differences between the two types of workers, including the differences in legal definitions, depending on the local jurisdiction and the local employment laws. In the United States, the Supreme Court has ruled there is no single test for the determination of employment status which would define the worker as an employee.
The Supreme Court has held that individual situations would need to be evaluated to determine employment statuses, such as the extent of the services, degree of control, the independence of the worker, and other factors. The definition of employee and the factors that decide an employment status are different worldwide.
Laws involving employment and what makes an employee-employer relationship differ worldwide, with the different employment laws unique to each country. It is essential to understand the employment laws, regulations, and any case law that may have set precedents in court rulings for each country in which employers intend to hire in or contract with contractors or freelancers. In general, an independent contractor:
- Is not dependent on one entity for employment and may work for multiple clients
- Has to control the scope of the work
- Makes a profit or loss from their business
- Does not receive benefits such as healthcare
- Does not have a supervisor and is not subordinate to anyone at the client company
- They can set their hours and can work for other clients
- Sets the price of their service and provides their tools and supplies for the job
Who Should Fill Out a 1099 Form?
Any entity that pays someone at least $600 for work in a tax year must fill out a 1099 form and send it to the IRS and the taxpayer that received the payments. The individual being paid at least $600 who needs a 1099 form would not be a corporation or an employee, who would normally require a W-2 rather than a 1099 form.
If your company paid contractors for work, then your company is required to fill out and send the forms. The payer of payments over $600 fills out the 1099 form and sends a copy to the IRS. The payee, in this case, uses their 1099 forms to calculate their income for income tax purposes.
The 1099 forms independent contractors receive are useful because contractors have no income tax withheld from their payments and can see the same dollar amount the IRS sees so that they can make accurate tax payments without penalties. Self-employed individuals use the information on the 1099 forms when they file their annual taxes and include the numbers on their appropriate schedules, such as the 1040-C schedule, the form for income from a business.
Essential Requirements of an Independent Contractor 1099-MISC Form
If your company made payments to contractors, your company is required to fill out a 1099-MISC form accurately. A 1099-MISC form is for miscellaneous income.
In general, a 1099-MISC is required if:
- Over $600 in payments were made to the taxpayer
- The taxpayer is not an employee or corporation
- The payments were not specifically payments that require other 1099 forms
The other 1099 forms are the following:
- 1099-DIV form for making dividend payments
- 1099-INT for reporting interest payments
- 1099-S for real estate transactions
- 1099-R for pension payouts
- 1099-G for tax refunds
- 1099-NEC for non-employee compensation
To complete the form correctly, you need to know the amount paid to the independent contractor for the tax year. Employers should keep accurate records of invoice payments throughout the year to be able to fill out a 1099 form. You will also need a W-9 form from the payee that includes their name, address, and taxpayer identification number. All forms are available from the IRS.
What Is Form 1099-NEC?
A 1099-NEC form is for non-employment compensation. Use this form to pay independent contractors for services performed. Employees who have received wages and salaries in the tax year still need to get the 1099 form that contractors receive.
How To Complete Form 1099-NEC
To complete a form 1099-NEC, you will need to receive the form from the IRS or a payroll service, fill in the taxpayer’s information, and fill in the payments made during the tax year. A 1099 form for subcontractors would be completed similarly. The IRS provides detailed instructions.
How To Submit Form 1099-NEC
Employers can file Forms for the IRS by mail or online.
How To File Form 1099 Online
The 1099 forms can be filed quickly by going to the government website.
What Happens if You Miss the 1099 Filing Deadline?
The deadline for sending independent contractor form 1099 is January 31 for the previous tax year. If the deadline falls on a weekend, the deadline is the following business day. The penalties range from $30 to $100 per form, depending on the lateness of filing.
Companies that pay employees file paperwork for the IRS, such as W-4 forms that show how much that employee was paid and how much income tax was withheld. Independent contractors do not fill in a W-2 form for tax withholding because they are paid by invoice by client companies with no income tax withheld.
The 1099 forms for independent contractors show how much a company pays contractors. These forms show the contractor and IRS how much money was paid to them by the company. The payer, in this case, a client company, is responsible for filling in the forms and sending them to the IRS and the contractor.
Skuad can help companies working with contractors and employees to hire quickly, onboard, and pay international remote workers. Skuad can also assist with tax and employment law compliance issues. For a demonstration of what Skuad can do for you, contact us today.