There is a lot of confusion around independent contractors and how to handle them. This section is the basics to keep you compliant for tax purposes.
How do I determine if someone is an independent contractor ?
When you spend money for people to work for you they fall into 3 categories.
- Employees – In this case, you set them up on payroll and issue them a W-2.
- Outside Services – You pay another ‘company’ with an EIN for their services.
- Independent contractors – You pay a person using their Social Security Number.
It is simple. For tax purposes, ff you pay someone using their Social Security Number, they are an independent contractor and you need to issue them a 1099 at the end of the year. Labeling them ‘Continuing Education’ or anything else on your P&L doesn’t change anything. The IRS and CA FTB have been cracking down on this.
Remember that you are only required to file a 1099 if you paid someone more than $600 during the calendar year. If you paid them less, you do not have to file anything.
How do I handle my independent contractors ?
As long as you stay organized, independent contractors are easy.
- W-9 – This is a government form that allows you to expense the work for tax purposes. Make sure to get a signed W-9 from all independent contractors before you pay them. Once you pay someone someone, it is harder to get people to comply. Link: Official 1099 Form.
- Save the W-9s and keep a list of people and their information. We provide a second tab on your ‘Transactions’ sheet in Google Docs that you can use. You should track all your payments to make sure our numbers are correct at the end of the year.
- Make sure to send out all 1099s before January 31st to avoid penalties. Penalties vary from $50 to $280 per form / per month, depending on how long past the deadline the business issues the form. There are maximum fines per year for small businesses.
We can help.
If you want to save yourself the hassle, we can file your 1099’s for you. We charge $20 for each 1099. This includes preparation, e-mail confirmation, and mailing.