Tax Compliance for Independent Contractors

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Construction-664668_1280Those who are self-employed are known as Independent Contractors. They may act as a consultant or a virtual staff member for a company or corporation. Meaning they do work on behalf of the company but aren’t considered an “employee” as far as benefits go – this means they have to have their own health benefits, retirement plan and they ultimately have to pay their own taxes. 

Independent contractors fall under a different tax umbrella than traditional employees do. They are responsible for paying everything on their own and if they don’t, are subject to stiff penalties and fines imposed by the IRS. 

Conversely, the companies who hire independent contractors have their own rules to follow as well. It’s true, these companies are not required to pay a contractor’s taxes, but there are still tax rules in place to protect the companies. One such way is the ability to issue a contractor a 1099 form to the contractor. Then it’s up to the accountant to make sure the I’s are dotted and the T’s are crossed. 

So what are the benefits of a company hiring independent contractors? There are plenty. Independent contractors are a great fit for short-term projects or to fill in when a permanent employee has taken a leave of absence for whatever reason. 

Here are a few things to keep in mind when hiring a contractor: 

  • Make it very clear to the independent contractor exactly what your relationship is with him or her. It is likely the person you are considering working with is already experienced with this type of working arrangement, but leave no stone unturned. Make it crystal clear from the start that you will not be responsible for paying their taxes on any money that exchanges hands for services rendered. 
  • Be very clear, too, on when you will issue the 1099 form to them. This is something you will want to discuss in the very beginning. Just like everyone else, independent contractors are expected to pay their taxes by mid-April, but some prefer to pay quarterly to avoid a big tax bill all at once. And – if you fail to issue the 1099 on time, you face stiff penalties of your own. 

If you are unsure what to do when working with an independent contractor, it is best to talk the situation over with your accountant. They should be able to inform you of the proper steps to take, papers to sign and more. Don’t try to wing it and get yourself in trouble.