– Independent contractors work for a company where the business controls the result of the work instead of how the work gets done.
– They provide specific services for projects and assignments under a written contract.
– Their work is governed by a contract end date and specific deadlines.
– They decide how and when the work gets completed within specified deadlines.
– They can simultaneously work on multiple contracts with different businesses.
– They choose their own tools and methods for the work they complete.
– They pay their own self-employment taxes as both an employer and employee.
– They don’t receive health or other benefits from the business within the terms of their contract. – Independent contractors are subject to self-employment taxes and receive a 1099 form at tax time.
– Traditional employees receive specific benefits and protections mandated by law, while independent contractors manage these costs alone and are typically only protected by the contract they’ve signed.
– Misclassifying employees can lead to IRS penalties, payroll tax revenue losses, and potential legal and tax issues, so it’s important to use the correct forms when hiring workers.
– The IRS and US Department of Labor are cracking down on employers who misclassify employees as contractors, collecting unpaid taxes and preventing potential losses in payroll tax revenue.
– Employees receive a W-2 form at tax time, while independent contractors receive a 1099 form if they earned $600 or more from the business during the tax year.
– Independent contractors are responsible for calculating and paying their own taxes based on their total annual income for the year. 1. Independent contractors and outsourced service providers should complete Form W-9 to indicate they are operating as a business and designate their business type.
2. Form W-9 is needed to accurately create and file Form 1099-MISC, which reports payments to non-employees made by the company.
3. 1099-MISC filing deadline varies from end of January to end of March of the following year, depending on form contents and filing method.
4. Independent contractors operating as a corporation are exempt from needing a 1099 filed for their services.
5. Employers should create independent contractor agreements for individuals who work as sole proprietors for multiple businesses, and ensure they sign the agreement.
6. Employers can modify an existing independent contractor agreement template to reduce legal expenses and review the revision with an attorney.
7. If unsure which form to fill out, employers can file Form SS-8 to determine worker status for federal employment taxes and income tax withholding.
8. Properly categorizing independent contractors and employees, creating necessary documentation, and tracking their work helps prevent misclassification and provides the IRS and state governments with necessary tax revenue information.
https://www.firstcitizens.com/small-business/insights/taxes/independent-contractors-versus-employees
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