Independent contactors can be valuable resources for small business owners. You can often hire an IC instead of an employee to take care of certain tasks to give you time to focus on your business. You don’t have to pay a salary. You pay by the project. You don’t pay FICA taxes on independent contractor income. It’s also easy to end the relationship. But there are some pitfalls to be aware of when you’re hiring an IC.
Independent Contractor or Employee?
An independent contractor provides services to your business, but they aren’t employees of your business. An IC is usually hired to do a specific task, such as cleaning or bookkeeping. You can explain what you need done, but you may not have control over how it is done.
The IRS frowns on hiring independent contractors who are treated as employees because you don’t pay taxes on the IC’s income. The IC is responsible for their own taxes. Most workers are employees, unless you can show the IRS otherwise. It’s determined by who controls the work. The IRS can help you determine status if you are unclear.
Paying an Independent Contractor
When paying an IC, you should keep a W-9 form on file, showing the IC’s taxpayer ID. You don’t pay unemployment taxes or workers’ compensation insurance for ICs, but you do need to make sure to track how much you pay them. You will report the total payments to the IRS at the end of the year. You will also need to send each IC a 1099-NEC form if you paid them more than $600 annually. This is a new form for 2020, so make sure you use the correct form.
Although you don’t need a written contract for hiring an independent contractor, you certainly should have one. You want to include requirements about pay, confidentiality and deadlines for work in your contract.
Northgate Capital Finance can help you find financing for your business. Contact us for more information.