Working with independent contractors grants employers flexibility and reduced costs, thereby making them an excellent choice for short-term projects. Although contractors are self-employed individuals who file their taxes, businesses still must provide them with the proper 1099 tax forms when tax season rolls around.
According to the Internal Revenue Service (IRS), the 1099 Form is a tax form that documents payment made by an individual or business that is not one's employer. There are various types of 1099 forms, such as 1099-NEC, 1099-MISC, 1099-G, and more. Essentially, these forms are required to document any supplemental income over $600 that was not paid as an employer.
In the case of independent contractors or freelancers, potentially all of their income comes from non-employers, requiring businesses to fill out a 1099-NEC (non-employee compensation) form each year. Businesses are also required to send the appropriate 1099 form to freelancers, vendors, and other individuals to who they paid over $600 during the tax year.
There are also regulations and best practices for paying independent contractors, such as digital payment methods, accurate record-keeping, and essential contractual agreements. Skuad is a leading employment solution that helps businesses stay compliant when managing and paying independent contractors, including helping with proper 1099 Form distribution.
In this article, we’ll answer the following questions:
- What is a Form 1099?
- Can I hire 1099 employees?
- How do I pay 1099 workers?
- What is the best payroll software for contractors?
- What are the best practices for 1099 workers?
Components of 1099
There are various types of 1099 forms required for non-employee earnings above $600. These earnings include rental income, freelancer or independent contractor income, tax refund earnings, gambling winnings, and more.
For all payments made to vendors or freelancers that totaled above $600 during the tax year, the payer is required to send the appropriate 1099 form, likely Form 1099-NEC, to the payee and the IRS. The payee then fills out their information and pays the amount of income tax due to the IRS.
Some of the different types of 1099 forms are:
- 1099-NEC – For those who earned $600 or more in non-employee compensation from a person or business.
- 1099-MISC – For those who earned $600 or more in rent or royalty payments.
- 1099-G – For those who received a state or local tax refund.
- 1099-INT – For those who earned over $600 in interest income.
Starting in 2020, the IRS created the form 1099-NEC for non-employee compensation. Previously, NEC was reported on 1099-MISC in Box 7. Now, this income is reported in Box 1 of 1099-NEC. If you have paid a contractor or freelancer more than $600 for their services, you will need to send them an accurate 1099-NEC form.
The 1099-NEC Form requires the following information to be filled out on the form:
- Payer’s name
- Payer’s Taxpayer Identification Number (TIN)
- Recipient’s name and address
- Recipient’s TIN
- Amount of non-employee compensation
- Amount of federal and state income tax withheld
Form 1099-NEC is not included in the Consolidated Federal or State Filing Program. Thus, this form must be directly filed in states with income tax. The deadline for filing 1099 employer taxes is January 31, or the following working day if applicable. The 1099-NEC form must be given to the recipient, as well as filed to the IRS, by this date each year.
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Methods To Pay 1099 Workers
Typically, independent contractors are paid hourly or for each job. Depending on the type of work or business, contractors and freelancers may send an invoice each month, or they may be on automatic payroll for the business. Some freelancers also require an initial deposit for projects, with the rest of the payments due in installments. Since every self-employed contractor is different, it’s essential to have a signed contract before starting work that details timelines and payment arrangements.
In terms of payment methods, there are many acceptable ways to pay freelancers. While paying with checks may have been the norm in the past, most contractors today expect to be paid through fast and convenient digital payments. Common digital payment methods to pay contractors are PayPal, wire transfer, and SWIFT for international payments. Many businesses utilize payroll software like Skuad to automatically manage multiple contractor payments.
Businesses need to take the necessary steps to set up compliant 1099 payroll before working with contractors. The steps to compliantly set up and execute contractor payroll in the United States are:
- Create and sign a workers' contract. The contract should contain a statement of work (SOW) including language on the classification of the worker.
- Obtain the contractor’s W-9 Form and Taxpayer Identification Number (TIN). This is necessary before starting any work or payment, and it will be used to report payments to the IRS.
- Start working and paying the contractor for their work. Pay according to the agreed-upon methods and timelines in the contract.
- Complete any requested backup withholdings to the IRS, if given notice.
- Track all payments thoroughly throughout the tax year.
- File Form 1099-NEC to the IRS by January 31 each year, or the following working day if January 31 falls on a non-working day. Additionally, send Form 1099-NEC to your contractors.
Businesses in the U.S. still need to file foreign independent contractor 1099 forms when working with international contractors and freelancers. They may also need to comply with any foreign tax regulations for each specific country.
To simplify this process, as well as avoid any costly legal mistakes, many businesses partner with payroll solutions and 1099 service providers to outsource and automate all payroll to independent contractors. Using payroll software to pay your contractors typically adds a layer of protection from legal issues. It also makes it easy to compliantly manage all of your contractors from one place.
Best Payroll Software To Pay 1099 Employees
For many businesses, using payroll software to pay 1099 workers is often the smartest, simplest, safest, and most cost-effective option. Skuad provides the best payroll software for 1099 employees that helps businesses pay employees and independent contractors in over 160 countries.
With Skuad, businesses can:
- Pay international teams in one click
- Put payroll on auto-pilot for guaranteed on-time payments
- Pay in over 100 currencies
- Manage payroll from one dashboard
- Remain compliant with domestic and foreign regulations
Skuad also ensures legal compliance with contract creation and 1099 tax form delivery included in its payroll services. Skuad auto-generates contractor invoices and pays contractors in their local currencies, making paying independent contractors simpler than ever before. Schedule a demo with Skuad to see how we can provide a leading payroll solution for your company.
1099 Best Practices
When working with 1099 workers, there are some best practices that businesses and contractors alike prefer to follow. Some 1099 best practices are:
In addition to paying freelancers and contractors on time, as you would with automated employee payroll, contractors expect to receive their 1099-NEC forms on time. Form 1099-NEC is due to recipients by January 31, and failure to do so on time not only leads to dissatisfied contractors but also fines from the IRS. Make sure you keep track of payments throughout the year and have these statements ready to go.
It is completely up to the employer to classify contractors and employees correctly, so ensure this compliance from the get-go. Misclassification of contractors as employees, and vice versa, may result in legal issues, fines, and due back-payments of wages. Misclassification when working with independent contractors may occur when contractors are treated as employees.
When determining whether a worker is an independent contractor, understand that a contractor:
- Controls how and where their work is done
- Controls their working hours
- Works on a contract basis
- Works for multiple clients or businesses
- Receives no employee benefits
- May send invoices to clients for payments
W-9 Form and TIN
It is also best practice for the client or organization to obtain a correct W-9 Form and taxpayer identification number (TIN) before commencing work together. This is also essential for legal and tax proceedings. For example, you will need the TIN for filing the 1099-NEC form in January. You can also use the TIN Matching service from the IRS to ensure you have the correct TIN and W-9 information, but make sure to do so well before 1099s are due.
Backup Withholding Requests
Occasionally, the IRS will send a request to a business to complete backup withholding from contractor payments. This means businesses will withhold 24% of contractor payroll, and contractors won’t owe as much in taxes at the end of the year. However, failing to complete this IRS request will result in contractors having to pay the amount in full themselves, in addition to potential fines.
To ensure compliance and productive contractors when filing 1099 forms, it is best to partner with a payroll solution like Skuad to automate this payroll process. This way, you can simply focus on collaborating with your contractors.
Skuad enables organizations to compliantly hire, pay, and manage 1099 employees in over 160 countries. Skuad’s global employment and payroll platform allows you to manage payroll and more from one, unified dashboard, making it easier than ever to manage your globally distributed team.
By partnering with Skuad, you can build an efficient and compliant global remote team. To know more about Skuad, Book a demo with Skuad today