Hiring independent contractors add a whole new element to the payroll process. 1099 employees differ from W-2 employees because you don’t have to withhold or pay any taxes and you don’t have to offer any health insurance benefits.
Many employees are turning to independent contract work in the U.S., and some industry experts predict that “freelancers will make up the majority of the U.S. workforce within the next decade,” according to this article from ADP. If this is the case, thousands of organizations will have to rethink their business model and how to better utilize the talent of independent contractors. For now, let’s explore these three ways to better manage independent contractors in the payroll process.
1. Correctly identify independent contractors
The IRS is strict about worker classification status, making it necessary to classify your employees correctly. When identifying an employee as an independent contractor vs. W-2 you’ll need to consider the following categories: behavioral control, financial control and the relationship of parties. When examining these different areas, go over the contract with your employee to examine if a pension plan, insurance and vacation pay are offered.
If you do accidentally misclassify an independent contract, you’ll be held liable for employment taxes for that worker and subject to a fine. With the right automated software, you’ll be at less risk of misclassifying an employee.
2. Understand the payment process
Paying independent contractors is a bit tricky because they work varying hours. Most of the time, independent contractors are paid hourly and are required to invoice their hours to the employer. Depending on the project, independent contractors may request an upfront deposit and milestone payments as the work’s completed. Be sure to have an error-free internal process to keep your team organized.
3. Complete the correct paperwork
In order to set up an independent contractor correctly in your payroll system, you’ll need to send them a W-9 at the beginning of the agreement. In this form, you’ll gather the independent contractor’s tax identification number which allows you to provide compensation.
If you pay more than $600 per year for independent contractors for the work performed, you must complete a Form 1099-NEC and provide a copy to the IRS.
If you need assistance with utilizing the latest payroll technology for your business, check out the team at Payroll Office of America. They are an exceptional payroll outsourcing firm that works hard to become an extension of your business. Click here to schedule your free payroll analysis.
