How to Pay Someone as a 1099 Contractor

Paying independent contractors involves specific steps for tax compliance. This process differs significantly from paying employees, as contractors manage their own taxes. Understanding these distinctions helps businesses accurately report payments and avoid issues.

Determining Worker Classification

Classifying a worker as an independent contractor or an employee is a foundational step. The Internal Revenue Service (IRS) uses a multi-factor approach, known as the common law rules, to make this determination. These rules examine behavioral control, financial control, and the type of relationship. Misclassifying workers can lead to penalties.

Behavioral control considers whether the business directs or controls how work is done. This includes evaluating the level of instruction given (when, where, tools). Extensive training also suggests an employer-employee relationship.

Financial control looks at whether the business directs or controls the financial aspects of the worker’s job. Factors include unreimbursed business expenses, investment in facilities or tools, and the ability to realize a profit or incur a loss. Contractors typically have significant unreimbursed expenses and the opportunity for profit or loss.

The type of relationship examines how the parties perceive their interaction. This involves written contracts, employee-type benefits (like insurance or vacation pay), and relationship permanency. Services key to regular operations may also suggest an employer-employee relationship.

Gathering Required Worker Information

Once a worker is classified as an independent contractor, collect their tax information using IRS Form W-9, “Request for Taxpayer Identification Number and Certification.” This form is essential for gathering accurate details for year-end reporting.

Form W-9 requests specific information from the independent contractor, including their legal name, business name (if applicable), and current address. It requires their Taxpayer Identification Number (TIN), which can be an SSN or an EIN. The contractor certifies the information is correct and indicates whether they are subject to backup withholding.

It is standard practice to request a completed Form W-9 from the independent contractor before payments. This helps ensure all required information is on hand for year-end reporting. An accurate W-9 helps prevent delays and potential issues with IRS reporting. Businesses should retain the W-9 as support.

Issuing and Filing Form 1099

Reporting payments to independent contractors involves issuing and filing Form 1099-NEC, Nonemployee Compensation. This form is used for payments of $600 or more to individuals or unincorporated businesses for services performed in a trade or business.

The minimum payment threshold for Form 1099-NEC is $600 in a calendar year. If total payments to a contractor for services reach or exceed this amount, a Form 1099-NEC must be issued. This threshold applies to payments made in a trade or business.

The deadlines for Form 1099-NEC are generally January 31 of the year following the payment year. This deadline applies to both furnishing Copy B to the recipient and filing Copy A with the IRS. If January 31 falls on a weekend or holiday, the deadline shifts to the next business day.

Businesses can file Form 1099-NEC on paper or electronically. Electronic filing is required if a business files 10 or more information returns in a calendar year. The IRS provides the Filing Information Returns Electronically (FIRE) system for electronic submissions.

Maintaining Payment Records

Maintaining accurate records for 1099 contractors is an ongoing compliance obligation. These records serve as documentation for tax purposes and are important for IRS inquiries or audits. Proper record-keeping ensures reported information is accurate and verifiable.

Businesses should retain copies of W-9 forms, invoices, contracts, and proof of payments like bank statements or canceled checks. Copies of all filed Form 1099-NECs should also be retained.

Records should be retained for three to seven years. W-9 forms should be kept for at least four years after the tax year of final payment or related tax return filing. This retention period aligns with the statute of limitations for IRS audits.