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.
Who qualifies as a contract worker?
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:
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
- Financial: Are the business aspects of the worker’s job controlled by the payer? (e.g., Will the organization determine how the worker is paid, reimburse for expenses or provide tools/supplies, etc.?)
- Type of relationship: Are there written contracts or employee-type benefits, such as a pension plan, insurance and vacation pay? Will the relationship continue, and is the work performed a key aspect of the business?
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.
[Read more: What to Know Before Hiring Gig Workers]
Form W-9
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.
Form 1099-NEC
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.
Form 1096
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.
The written contract
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.
[Read more: 5 Perks You Can Offer 1099 Workers]
In addition, the contract should include:
- Scope of work: the deliverables, timeline, deadlines and expected results.
- Payment schedule: the amount and timing of payments and what will happen if payments are not made or made late.
- Ownership: whether the contractor or the hiring company will own the final deliverables.
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.
Invoices
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.
CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.
Follow us on Instagram for more expert tips & business owners’ stories.
CO—is committed to helping you start, run and grow your small business. Learn more about the benefits of small business membership in the U.S. Chamber of Commerce, here.
