Fill out these forms to stay compliant with IRS tax regulations and to bring an independent onboard smoothly.
Data shows that in recent years, more and more small business owners are turning to contract workers in lieu of hiring full-time employees. Contract workers allow business owners to hire help for specific short-term projects, a seasonal shopping rush or to fill in a talent gap while searching for a full-time new hire.
Hiring a contract worker, however, is a slightly different process to bringing in a full-time employee. There are different forms needed and documents to collect to stay compliant with IRS tax regulations. Here are some key contract worker forms you need to know when working with your next independent contractor.
There are different documents needed whether the person whom you are hiring is an independent contractor or a full-time employee. The IRS applies three factors in determining whether the hire is a contract worker or not. These factors are:
If you answer yes to all of these questions, it’s highly likely that the individual is an employee rather than a contract worker or independent contractor. If not, then here are the forms you will need to get started working with an independent contractor.
Start with the IRS Form W-9: Request for Taxpayer Identification Number and Certification. You won’t need to submit this to the IRS, but you will need to keep it on file for at least four years after the hiring date.
This form is used to request the correct name and taxpayer identification number (TIN) for the person with whom you are contracting. A TIN is either a Social Security number or an employer identification number (EIN) if the contractor is registered as a business entity.
“Make sure the contractor checks the box exempting him [or her] from tax withholding. As a separate business entity, the IC should file his or her own self-employment taxes,” noted Zenefits.
Download IRS Form W-9 here.
While not a form per se, all business owners should prepare a written contract before working with an independent contractor.
Next, you will also need to fill out IRS Form 1099-NEC. This is a new change that was initiated in 2020. Previously, the 1099-Misc was used to report payments to independent contractors who cover their own employment taxes. Now, however, the IRS uses form 1099-NEC, short for “non-employee compensation.”
The rules for filling out form 1099-NEC are not dissimilar to the previous 1099-MISC guidelines. Fill out the 1099-NEC if you have paid a contractor at least $600 for the tax year, specifically for services for your business. This means it can not be used for personal expenses, such as home renovations.
The deadline for 1099-NEC is January 31st. Send one copy to the IRS and another copy to the contractor, either by mail or e-filing. Download IRS Form 1099-NEC here.
Finally, if you will be paying multiple contractors, you will need to file Form 1096 with a summary of all the 1099s you prepared. This needs to be submitted to the IRS by January 31, although e-filers do not need to file a 1096.
Download IRS Form 1096 here.
While not a form per se, all business owners should prepare a written contract before working with an independent contractor. The contract should specify explicitly that the person is an independent contractor, not an employee.
“It's essential that both you and the independent contractor understand the type of relationship and the fact that they are responsible for paying their own income taxes and Social Security/Medicare taxes,” wrote The Balance.
In addition, the contract should include:
Most experts recommend consulting an attorney while preparing the contract to ensure you’ve included all the terms and conditions relevant to the business relationship.
The final documents you need to collect and keep on file are contractor invoices. The invoices are important for both your accounting and for compliance in the event of a tax audit. The amount on the invoices must match the amount you cite on the 1099-NEC.
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