LUTZ BUSINESS INSIGHTS
hiring an independent contractor? your responsibilities
kristen curtis, CLIENT ACCOUNTING SERVICES MANAGER
One in five jobs in the United States is held by an independent contractor today, according to a recent NPR/Marist poll. By 2028, half the workforce could consist of freelancers and contractors. If your company hasn’t yet hired a remote worker, it’s possible that you may in the future.
Taking on an independent contractor can be more fiscally feasible for your business. You are not on the hook for payroll taxes, nor will you feel pressure to provide benefits like health insurance, retirement plans, and paid time off. You also have a much larger pool of potential candidates since your workers don’t have to live near your business location.
But the IRS has very strict rules about the differences between freelancers and employees. When a company hires independent contractors, an employer can, “… control or direct only the result of the work and not what will be done or how it will be done.” The agency has been known to conduct investigations when employment status is questionable.
If you have determined that your new hire will indeed be a contractor, there are a few steps you must take to be compliant.
Your employer responsibilities will be minimal, but every task is important. Here’s what you need to do if you’re hiring an independent contractor.
- Apply for an Employer Identification Number (EIN), if you don’t already have one. You can apply online here and get your EIN instantly.
- Ask the contractor to complete a Form W-9. You will need the information entered on the form when you report annual earnings to the IRS. You’ll find it here. You do not have to send this form to the IRS. It’s for your information only, but the IRS wants you to keep it for four years.
- At the end of the tax year, issue a Form 1099-MISC for each contractor. If you paid them $600 or more over the course of a tax year, you are required to provide a Form 1099-MISC to both them and the IRS by January 31 of the year following payment. In some cases, this is not required. See the 1099 instructions for more information.
When you submit your 1099-MISC forms to the IRS, you will need to include a Form 1096. You will find instructions for obtaining this document and filing electronically here. Read this page carefully, as the form provided is for informational purposes only.
A DIFFICULT DETERMINATION
You may think that the distinction between an employee and an independent contractor is fairly obvious. In many cases, it’s not. The IRS looks at behavioral and financial factors, as well as your overall relationship, and there’s no magic formula for making the determination. We can help you evaluate your facts and circumstances, and ensure that you’re compliant with the IRS in terms of this critical classification. Contact us when you’re ready.
ABOUT THE AUTHOR
KRISTEN CURTIS + CLIENT ACCOUNTING SERVICES MANAGER
Kristen Curtis joined the firm in 2000 and serves as a Client Accounting Services Manager. She has significant experience in small business accounting and advisory services; new business consulting; and software implementation and training.
AREAS OF FOCUS
AFFILIATIONS AND CREDENTIALS
- American Institute of Certified Public Accountants, Member
- Nebraska Society of Certified Public Accountants, Member
- Certified Public Accountant
- BSBA in Accounting, Iowa State University, Ames, IA
- Presbyterian Church of the Cross, Session Member, Christian Education, Committee Member
- P.E.O., Philanthropic Educational Organization, Member
- Hiring an Independent Contractor? Your Responsibilities
- 5 Common Payroll Mistakes and How to Avoid Them
- Onboarding Your First Employee? Your New Tax Responsibilities
- Why You Should Automate Expense Reporting, and How to Do It
- Service-Based Business? How QuickBooks Helps You Track Time
- 4 Ways QuickBooks Helps You Accelerate Receivables
- Are You Following Best Practices for Dealing With Form 1099-Misc?
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