Are you thinking of expanding your business with an army of freelancers? The benefits of bringing contractors on board can be extensive. You’ll cover increasingly demanding workloads and projects so your employees don’t feel like they’re stretched too thin. Or, you’ll meet the fluctuating needs of clients without incurring the expenses that come with full-time staff.
But before you ramp up your recruiting efforts, you might want to familiarize yourself with the IRS’s requirements. These must-dos include a list of forms you and your future contract workers will need to complete. Here are four of them.
1. 1099s
1099 forms are why gig workers often say they’re seeking a 1099 position versus a W-2 job. The reason behind the jargon is simple. An independent contractor who earns $600 or more from a client in a year receives a 1099 form. The form reports their income to the IRS and is a good reference when it’s tax time. A freelancer doesn’t have to always add up all the payments they received from a customer.
The difference between a 1099 and a W-2 is it usually doesn’t list any withholdings for income taxes and benefits. It’s the responsibility of a freelancer to ensure their federal and state income taxes get paid. However, businesses that hire contractors must fill out a 1099nec form for each contractor. Of course, there are a few rules and stipulations.
The person can’t be serving in a W-2 position and the services they perform must be related to your business. You don’t have to fill out the form if you’ve paid a contractor less than $600 during the year. Plus, the payments should be going to a sole proprietor, an LLC owned by a single person, or a partnership. The earnings can also go to an estate.
One of the caveats to the 1099-NEC is how you pay your contractors. If you pay them through a third-party platform, the platform reports those payments. The same goes for paying freelancers via credit and debit cards. Using a third party can save you from completing 1099-NECs for gig workers.
2. W-9s
Before you fill out a 1099 form, you need your contractor’s W-9. Both sole proprietors and business entities use W-9s to disclose their taxpayer ID. A W-9 form also lists a freelancer’s legal name and address. A 1099 form requires you to include a gig worker’s name, address, and taxpayer ID.
For many freelancers, their taxpayer identification number will be their Social Security Number. But don’t be surprised if some use an Employer Identification Number instead. The contractor may be doing business as an entity and hire subcontractors. For example, you hire a partnership taxed as an LLC to work on a temporary project. The partnership is the entity you pay as your contractor, but the tasks get done by subcontractors.
According to IRS standards, you should keep W-9 forms on file for four years. It’s also best practice to have your freelancers complete their W-9s upfront. You don’t want to be chasing them down at the end of the year. Make filling out W-9 forms a part of your onboarding process for each contractor.
3. Form SS-8
Unsure if your working relationship with someone could be considered misclassification? This is where form SS-8 can come in handy. Either your business or the freelancer can initiate the form, but both sides must complete it. The IRS uses form SS-8 to determine whether a worker meets the definition of an employee or contractor.
Typically, a freelancer remains in control of the work they do. They’re also responsible for purchasing supplies and equipment to complete the job. For instance, a business can’t dictate when a contractor can work. It’s up to the freelancer to determine their schedule, as long as project deliverables are met.
Furthermore, an organization usually can’t tell a contractor how to perform the job. While a business can lay out quality standards and guidelines in a written contract, the degree of control is less. In other words, a client can’t stand over a freelancer’s shoulder and control every move they make. The contractor is responsible for designing their processes and work methods.
Nonetheless, the lines between employee and gig worker can sometimes blur. Some states have additional or more stringent classification requirements. Form SS-8 can help you avoid the penalties that come from misclassification.
4. Form 1096
Form 1096 is a summary of all the returns your business filed for your freelancers. It’s not a form you provide to contractors. Instead, you hand it over to the IRS.
Say you have a team of 10 independent contractors. You’ve submitted 1099s for each of them. Your business would fill out one 1096 summarizing those filings. The 1096 form should be filled out for each type of 1099, though.
Expanding on the previous example, say you’ve filed 10 1099-NECs and two 1099-MISC forms. The 1099-MISC forms were for royalties you paid two of your freelance writers. You’ll need to submit two 1096 forms to the IRS. One will summarize the 1099-NECs and the other will recap the 1099-MISC forms. Organizations should plan on preparing and submitting 1096 forms by the end of each business year.
Tax Documents for Contractors
Hiring gig workers to help run your business is a move you may someday want to make. Perhaps that day is now. Before you extend offers and sign the contracts, it’s imperative to understand what your reporting obligations are to the IRS. Tax forms, such as 1099s, are par for the course. Knowing when and how to file them can keep your business compliant.
