Independent contractors contribute significantly to the U.S. economy every year. In 2021, the U.S. had 23.9 million independent contractors. This number has increased significantly in the last five years (12.9 million in 2017). It is projected that more than 86.5 million people will work as independent contractors in the U.S. by 2028, which is more than half of the country’s population. While organizations are hiring more independent contractors daily, the one thing that constantly remains complicated is the taxes.
One question that always pops us is, do independent contractors pay taxes? The answer is yes. Depending on their income, independent contractors do pay taxes. Independent contractor taxes, also known as 1099 contractor taxes, can be paid by the employer or the contractors themselves. While many contractors choose to pay taxes on their own, many are either unaware or don’t pay taxes at all. The latter forces employers to take up the responsibility of going through the paperwork and filing taxes for their contractors.
Why you are responsible for independent contractor taxes
If your independent contractors do not file taxes at their end, you must clear the paperwork and deduct the taxes from their payments. Now, there are standardized steps and rules for this, which we will discuss further, but an employer must do this for the following reasons:
- To avoid employee misclassification: As a business owner, you are bound to hire both full-time employees and independent contractors. The payroll for your full-time workers takes care of their taxes and social security deductions. However, you need to specify separately the same for covering taxes for independent contractors. If not done accurately, this can lead to employee misclassification. Misclassification has grave consequences and will lead to a lot of time, money, and energy spent at courts and federal agencies.
- Error-free bookkeeping: Consider that an independent contractor worked with your organization for a few months and didn’t pay the required taxes. It will lead to a lot of ambiguity in your books for those months. This is because you will have provided the contractor with the right amounts for basic pay, insurance, etc. However, the same money was not documented. As a result, you will be taxed for the amount that should have been deducted from the contractor’s paycheck.
- No hassles with the IRS: No organization looks for any hassles with the IRS. Things like employee misclassification and undocumented transactions are monitored by the IRS very closely, and any ambiguity in your accounts may lead you to a letter from the IRS waiting on your desk.
Paying your independent contractor taxes is important, but knowing the reasons behind it is just as important. Now that you know why you must do it let’s look at how you can pay independent contractor taxes.
Paying independent contractor taxes as an employer
As an employer, you must follow a procedure and fill out the proper forms irrespective of whether your contractors pay taxes on their own.
Step 1 – Form W-9:
Employers use Form W-9 to request independent contractors to fill out details like their name, Tax Identification Number(TIN), certifications, etc. Here, the tax identification number is the most critical detail that you need. The IRS will use this number to understand the taxes paid by the independent contractor.
Step 2 – Form 1099-NEC:
Form 1099-NEC helps you report your payments to independent contractors. You must fill out this form if you have paid an independent contractor more than $600 in a year.
Now, in an ideal situation where you have received the right information on Form W-9 and have filled out Form 1099-NEC, your job of paying independent contractor taxes is done. However, many contractors may not fill out Form W-9 due to some of these reasons:
- They do not have a Tax Identification Number
- They report their incomes incorrectly
In these cases, where you do not have access to a valid TIN for your independent contractor, you will have to deduct a certain amount of your contractor’s total earnings and report it to the IRS yourself. But how much do independent contractors pay in taxes? Well, for the US, you should deduct 24% of the contractor’s income if you are paying their taxes as at your end. Independent contractor tax rates may differ for every country. This process is also known as backup withholding.
Deadline for reporting independent contractor taxes
Generally, when independent contractors pay taxes on their own, they follow a quarterly deadline. However, when you file independent contractor taxes directly with the IRS, you need to follow a single deadline. All of your expenses towards independent contractors are reported through Form 1099-NEC. This form must be filled out, submitted, and sent to the IRS by the 31st of January of the following tax year.
For example, if you spend $25,000 in paying independent contractors in 2022, you will have to report the same by 31st January 2023. This amount will include the taxes that you have help from the contractors’ incomes(if any).
Paying independent contractor taxes may seem daunting; however, it can be simplified if done systematically.
Tips for paying independent contractor taxes
Running an independent contractor payroll is nowhere similar to paying your full-time employees. Here are some tips that you can follow to make paying taxes easier:
Make sure you have the right details on Form W-9
This is the single most important thing that you can do to make paying independent contractor taxes as easy as possible. Once you have the right TIN, you do not need to worry about deducting taxes on your own.
Classify your employees
You must ensure that there is a clear, documented distinction between your full-time employees and your contractors. This will help you avoid a lot of struggle with the IRS and other federal and state agencies. If you are confused around independent contractors vs employees, you must fill out Form SS-8 to understand and classify your workers on paper.
Make timely and well-documented payments
Making timely payments to your independent contractors is important as it will help you determine the exact amount of money you spent on paying contractors in a given year. This will be very helpful when you go out and fill out Form 1099-NEC. Moreover, it will also help you maintain a healthy professional relationship with your contractors.
Document backup withholdings
This will be of immense help in cases where you need to make independent contractor tax deductions yourself. To make this easier, you can highlight all independent contractors who have not submitted a valid TIN. This will help you make the right deductions and document them simultaneously when you pay them.
Yes, paying independent contractor taxes is a time-consuming and confusing task; however, it can be avoided if you partner with an independent contractor/freelancer payment platform.
Simplify independent contractor taxes with Multiplier!
Paying contractor taxes is a challenge, but paying contractors, in general, is also a challenge, especially if you are dealing with multiple contractors across states and countries.
Multiplier’s freelancer payments platform helps you onboard, pay, and manage freelancers and contractors across the globe in a few simple clicks.
Our user-friendly dashboard provides you with all the crucial information like the number of hours worked, leaves taken, remuneration, location, etc., as and when you need it.
With entities in over 150 countries, Multiplier can help you access talent across the globe, generate customized and compliant employment contracts, and onboard contractors quickly. With Multiplier, you can choose customized payment cycles, pay in any currency, and stay compliant with all local labor and tax laws.
Multiplier also gives you the opportunity to attract more talent by providing benefits like bonuses and insurance for independent contractors.
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Frequently asked questions
Q. What are the independent contractor tax forms for employers?
The most important independent contractor tax forms for employers are forms W-9 and 1099-NEC.
Q. When should I withhold independent contractor taxes?
If your independent contractor fails to provide you with a valid tax identification number(TIN), you must withhold their income tax and deposit it directly with the IRS.
Q. Can independent contractors be paid a salary?
You can choose to pay your independent contractors on a monthly or bi-weekly basis, depending on your agreement. However, you must ensure that independent contractors are distinguished from full-time employees on paper.
