Independent Contractor Tax Form: Everything You Need to Know

An independent contractor tax form must be filled out by an independent contractor (IC) to report income to the IRS. Independent contractors and employees are categorized very differently, and it is critical that employers ascertain the difference before hiring. Being able to know the difference between the two is critical for tax purposes and for helping your business avoid costly legal consequences.

One of the principal variances between independent contractors and employees is the amount of control that they have over their work. Independent contractors have a higher degree of control over the work they do, their schedule, the tools they use, who they work for, and the marketing of their business. They are typically paid on a per-project basis, and because taxes are not withheld by the other party, the contractor must handle this themselves.

ICs are nonpermanent workers that contract with a business for certain goods or services. An IC can either be a single individual, a company, or a corporation. It could have its own business name, its own subordinates, its own bank account, its own clients, tools, schedule, and business records.

There are numerous advantages to employing independent contractors over hiring employees, including the amount you save in costs of labor, the reduction of liability, and the flexibility in hiring and firing. However, any discrepancies in classification of a person as an independent contractor rather than an employee can have significant legal and financial ramifications.

If you inaccurately categorize someone as an independent contractor rather than an employee, you or your business may have to reimburse them for payments under the FLSA, including any hours over 40 at minimum wage, and also pay Social Security, Medicare, and unemployment, etc.

Independent Contractors and the 1099

If an employer has paid an independent contractor more than $600 in payments related to the business, then the employer will need to fill out an IRS Form 1099-MISC. This form will provide an income summary of all the employer’s compensation that is not employee related. This form will be what the IC uses to fill out his taxes.

The employer is required to provide a 1099 to all contractors, including any limited liability companies or partnerships. Corporations are the exception; employers do not need to provide a 1099 form to most corporations. The 1099 must be received by the contractor no later than February 1.

The employer should make sure to have all of the information about who he contracted with throughout the year before filling out the 1099 form. To be cautious, it is recommended that the employer check in with the contractor to make sure all of the information is still accurate and up to date. Once all of this information is verified, the employer can order the 1099 forms from the IRS website. An employer can also go to a store like Staples or FedEx or use tax software such as Quickbooks to correctly fill out and file the 1099 form.

Employers must make sure to provide their Federal Tax ID number on the 1099, as well as the contractor’s employee identification number or Social Security number. The 1099 form should also include the total amount of money that the contractor made, and it must be under the “non-employee compensation” section since a contractor is technically not an employee. This is a very important distinction.

The last step is to fill out the contact information form for the employer. This whole process must be completed for each independent contractor the employer hired in a given year.

One of the benefits of incorporating the 1099 form with the employer’s existing tax software is because the relevant information can be automatically filled out on the form, which minimizes the amount of time spent on the 1099 as well as any errors that might occur.

The final step is to mail the forms. Each 1099 form must be hand delivered or sent in the mail on or before February 1. If the employer fails to do so, there could be a penalty of up to $250. If the employer files the 1099 through postal mail, form 1096 and Copy A of each 1099 must also be sent on or before February 29. However, if the employer is filing over the computer, he or she has until the end of March. Employers should retain Copy C for their own records as a precaution in case the IRS needs any more information.

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