Hiring independent contractors is always a good option for startups and large organizations. Several business owners are recruiting contractors for their benefit. Business owners are responsible for withholding all federal payroll taxes apart from employees’ salaries. Payroll for independent contractors is a bit different.
Organizations don’t have to foot the contractors' taxes since the contractor is solely responsible for paying the self-employment tax and federal payroll taxes. But, there are some guidelines you need to follow to avoid misclassification. And you must complete some documentation work for your tax returns. Otherwise, you will end up paying penalties and late fees to agencies like the IRS.
Especially for paying foreign independent contractors, setting up a faulty payroll system can result in heavy fines and lawsuits. Keep reading to find the ultimate solution to this problem. For more details, refer to our guide to managing international contractor payroll.
What is payroll for independent contractors?
An independent contractor is a person, business, or corporation that provides goods or services under a verbal or written agreement. However, unlike employees, they set their work times, location, and duration for executing the tasks.
You must issue a 1099 form to contractors for your tax filing as a business owner. It is necessary under the IRS tax code if you are paying more than $600/annum to your contractor. But many taxpayers are caught not issuing their 1099 forms. Here are the three main reasons.
- Most business owners and HR teams do not consult with professionals while signing an agreement.
- Some company heads are busy running around building a business and don't realize it until it's too late.
- The contractor may not have proper documentation to operate as such.
Before a 1099 form, you need to do one more critical thing while signing the agreement: Make sure the contractor signs and returns the W-9 form before issuing any payments. Otherwise, independent contractors may exploit you at the time of filing 1099. If you want to dive deep into the details of these forms, check out this guide on 1099 vs. W-9 forms.
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How to run payroll for independent contractors?
Are you a business owner working with both employees and independent contractors? It's crucial to understand that there is a difference between paying employees and paying contractors. Here's a step-by-step guideline for paying your contractors.
Determine worker classification
Classifying your workforce is very important, as the IRS may impose several penalties on you for misclassifying. Consequently, you may end up paying more than the employees’ payroll taxes or facing fines for misclassifying independent contractors and not offering them benefits.
Don’t know how to distinguish between employees and independent contractors? Here’s how you can do it.
Resources and finances
The independent contractor has complete control over the financial aspects of the project. They have the independence to choose the type of equipment they want to use and the online tools they want to use to complete the task.
Moreover, they have the right to hire employees, sub-contractors, and partner consultants to complete their tasks.
Independent contractors have the exclusive right to set up their hours and availability. They decide what work they will do when they will do it, and how they will do it.
Agencies like the IRS will identify your contractor as an employee, not an independent contractor, if you try to dictate:
- Working hours
- Working conditions
The legal side of the relationship
Contractors are not eligible for paid leave, benefits, and insurance. They are not permanent full-time or part-time workers of your organization. There is always a contract-based relationship between a business owner and an independent contractor for a specified duration.
Sign contractor agreement
Secondly, you have to sign a written document with your independent contractor. Typically, independent contractors come up with their agreement. Finalize the work details, and you have a deal. Next, you can dive into the documentation process.
Gather necessary information
Payroll for independent contractors will include a W9 form. Make sure the contractor signs and return the form to you. Through the W-9 form, business owners get the Social Security number or EIN. This helps in getting tax filing information for the worker to report wages.
Don't send this form directly to the IRS. It is only for your records as a business. The information will be used later in the year for filing form 1099.
Decide contractor rates, payment frequency, and payment type
All over the world, independent contractors are paid in numerous ways. Some of them are:
- Per project fee
- Hourly rate
- Via retainer
In this step, the independent contractor and business owner will decide mutually how the contractor will get paid, how often they will get paid, and the form of payment. That is what payroll is all about for U.S.-based independent contractors.
How to run payroll for international contractors?
Paying foreign contractors is more or less the same.
- Decide the payment rates, frequency, and type.
- Sign an agreement.
The only difference is the documents you require from your contractor to protect yourself from additional penalties and lawsuits.
If you are recruiting an international contractor or gig worker, instead of W-9, you have to issue another form, i.e., form W-8BEN. This is the only form you need to give to your international contractor. No need to send 1099 at the end of the year as there is no obligation from the IRS.
Issuing forms, paying international contractors, and maintaining records are complex. As a business owner, you don’t want to be stuck with tax details, payment delays, and navigating the intricacies of international tax and labor laws. That’s why software like Skuad is the best way to pay independent contractors online.
Differences between payroll for employees and payroll for independent contractors
Payroll for independent contractors is different from the employees. As a business owner, you need to have a firm grip on this to pay your workers accordingly. These differences work for both international and national contractors. They can be categorized into:
Paying independent contractors is different in terms of taxation processes. As a business owner, you don’t need to withhold:
- Payroll taxes
- Employer taxes
- State income tax
- Federal income tax
- Medicare tax
- Local tax
- Social Security tax
Similarly, you don't contribute to:
- Federal unemployment tax
- Medicare tax
- State unemployment tax
- Social Security tax
If you use the same payroll software for paying employees and contractors abroad, enter the right information to avoid taxation glitches.
Payroll for independent contractors doesn't include employee-type benefits. Employee benefits primarily include things like:
- Paid holidays
- Medical allowance
- Home allowance
- Provident funds
However, if you are signing a long-term contract, then the payroll for a contractor may include some additional benefits. Add those benefits to the agreement to prevent any legal issues.
Employees more or less have a fair idea of when they will get their payments. Most employees are paid hourly or are salaried. They may get their payments on the 15th of every month, once a week, or alternate weeks. That’s why the payment schedules of employees are quite predictable.
For independent contractors, payroll for independent contractors is unpredictable. Business owners can pay independent contractors via direct deposit.
As a business owner, you can also pay independent contractors using trustable software like Skuad. Especially in the case of international contractors, you may face tax issues and get stuck in never-ending delays. Avoid these snags by investing your time in other essential business affairs by letting a trusted agency handle it for you.
Payroll software for contractors and gig workers
A payroll platform or software is necessary for independent contractors, especially beyond borders. This will ensure timely payment to gig workers and independent contractors every time. Around 84% of independent contractors want to get paid more quickly compared to their current situation. As a business owner, you need to change your strategy if you want to work with more independent contractors and be ahead of the competition.
Easily pay international contractors with Skuad
Are you looking for the best payroll software for independent contractors? You can save your precious hours by using Skuad. It is a reliable resource for your business to manage and pay contractors worldwide. Skuad is an all-in-one solution for your business needs and is considered the best way to pay international contractors.
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