As a small business owner, at some point, you may need to hire an independent contractor. But what classifies a worker as an independent contractor, and what does that label mean for you? Read on to learn the essential information required for classifying a worker as an independent contractor.
What an Independent Contractor Is
Independent contractors are not considered employees of your business, and as such, they do not have taxes deducted from their wages. Instead, contractors will pay self-employment tax on their earnings. A few examples of independent contractors you may use are:
- Construction workers
- Freelance writers
- Graphic designers
Using Form W-9 with Contractors
You must have every independent contractor you hire complete a Form W-9, Request for Taxpayer Identification Number. This form is used to report nonemployee compensation of $600 or more. At the end of the year, you use Form W-9 to generation Form 1099-MISC for your contractors.
Independent Contractor IRS Guidelines
The IRS helps to break down the level of independence for contractors into the following three categories:
Consider whether your company can control what the worker is doing and how they complete a project.
Ask whether you can control other business aspects of the worker’s job. For instance, do you provide the worker with supplies, or do they bring their own?
Type of Relationship
Do you have any written contracts? Do you provide the worker with benefits, and will the relationship continue after the work is done? If the answer to those questions is “yes,” the worker is likely an employee.
FLSA Regulations for Independent Contractors
Employers must also look at the regulations imposed by the Fair Labor Standards Act. The FLSA provides six factors that can help you determine a worker’s status, including:
- If the work is integral to your business
- If the worker’s managerial skills affect their opportunity for profit and loss
- The worker’s investments in your business’s facilities or equipment
- If the work performed requires special skills
- The permanency of the work
- The nature and degree of control you have over the worker
Independent Contractor Tax Forms
When you submit Forms 1099-MISC to the IRS, you must also send Form 1096, which is the summary of all 1099 forms you file. You must give a Form 1099 copy to every contractor by January 31st and submit copies to several different agencies, including:
- Copy A: IRS, with Form 1096
- Copy B: Independent contractor
- Copy C: Keep in your business’s records
- Copy 1: State, if applicable
- Copy 2: Independent contractor
If You Still Are Not Sure
You can consult with a small business lawyer or professional to file Form SS-8, Determination of Worker Status. After you submit this form, the IRS will send you and your worker a determination letter that states the worker’s classification and tells you the next steps you need to take.
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