Do you have hired help, contractors, or 1099 workers supporting your business? Compensate their efforts by using these simple payment methods!
About 35% of workers in the U.S. are freelancing or are independent contractors.
If you decide to hire an independent contractor to help you manage projects or help you grow your business, you have to pay them for their work.
You have responsibilities to ensure that your hired help is qualified to do the work, that you follow the rules and regulations for contractors, and that you pay them on time.
Read on to learn all of this and more when it comes to hired help for your business.
Forms for Contractors
Once you have the contractor in place, they need to fill out a form to get paid. This is the W-9 form, which has the contractor’s Social Security information or tax ID number.
You will need this form at the end of the year to produce a 1099-MISC form. The IRS will use this to determine whether the contractor reported their earnings correctly when they filed their taxes.
In some cases, the contractor may be reluctant to provide their Social Security or tax identification information. The IRS will then use backup withholdings, which forces you to withhold 24% of the contractor’s pay, even though they don’t normally have funds withheld from their checks.
Paying Independent Contractors
Paying independent contractors is actually pretty simple. You may have to set them up in your payroll system in order to cut a check.
Contractors love to receive check stubs that document the invoice number and the work performed for the check. That’s because your contractors often have to do everyday things like get housing or apply for a loan.
They need to prove their income, and it’s hard to do so without a W-2 form or recent pay stubs as employees get. You can use a pay stub generator to create a pay stub and print out a check for the contractor.
How you’ll pay the contractor depends on your arrangement. You may agree to a flat monthly fee or work paid by the hour. The contractor is likely to send an invoice for the work performed.
You’ll want to have them document how they spent time working on your projects. This is for your records and protection, making sure you’re getting what you’re paying for.
If you get an invoice, you just have to cut a check with a pay stub attached and mail it out.
If you don’t get an invoice, you’ll need to calculate the number of hours worked and multiply by the agreed-upon hourly rate. That’s the amount of money that you need to pay your hired help.
The good news here is that you don’t have to withhold federal, state, and FICA taxes. The contractor is responsible for paying those taxes.
The only time you may have to withhold funds is if wages are being garnished by the IRS or they use backup withholdings.
End-of-Year Documentation for Hired Help
If there was a contractor that you used regularly for work, and they earned more than $600 during the year, you have one more form to fill out.
This is a 1099-MISC form, which shows how much the contractor earned for the entire year. It’s similar to a W-2 form for employees, except a 1099-Form is much simpler.
You just need your company information, Employer Identification Number (EIN), and address, the contractor’s basic information, and the amount earned. Like the W-2 form, this has to be submitted to contractors by January 31 with a copy going to the IRS.
Classifying Employees and Contractors
It seems like it’s much easier to manage hired help than to manage employees, doesn’t it? That’s because it is. Contractors have much more autonomy, and you can save on overhead expenses. Consider the costs of benefits, office space, and payroll taxes.
Does that mean you should only hire contractors to run your business? More businesses are turning to this solution, but they’re running into trouble. Businesses are under pressure by the IRS and state labor and tax authorities to properly classify employees and contractors.
How can you make sure you classify your workers correctly? There’s a small test that you should be able to pass. Ask yourself these questions first.
Does the worker have to be at a certain place at a certain time? Other than standard meetings, you can’t tell a contractor when they have to show up to do work. You’re paying contractors for the work performed, and you can’t control when and how the job gets done.
Is the job temporary or is it for an extended amount of time? Do you expect that the contractor will work for you for years on end? If you do, then that person is likely to be an employee.
Are you providing benefits to the worker? If you are, then that person may be an employee.
Do you train the worker on how to do their job? If so, that person is likely to be an employee. Contractors are expected to bring a level of knowledge and expertise that you don’t have.
For example, if you’re hiring a contractor to do SEO (search engine optimization) for your company, you shouldn’t have to train them on how to do SEO. You might inform them of the background of your business, but that’s it.
Paying Hired Help Legally
You may be in a position where you want to grow your business and need help to do it. Many businesses will turn to hired help in the form of independent contractors because it can cut down on overhead.
You must classify your contractors correctly to avoid the wrath of the tax authorities. You also want to make sure that the contractors fill out a W-9 form and that you pay them on time.
Author: Sasha Douglass
Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
