This can be a challenging time of year for my clients who hire independent contractors.
By the very nature of the 1099 work relationship, if you did not have them complete their paperwork in 2022, you may have a challenge getting it now before we file your taxes. So, make it a priority in 2023 to have all 1099’s (Freelancers, Outside Contract Companies, Non-employees) complete their Form W-9 and the 1099-MISC form before you pay them.
Step 1: Ask them to fill out Form W-9
When tax time rolls around, Form W-9 will be your best friend. You don’t need to send it anywhere, but you are required to keep it on file for a minimum of four years. Ask them to complete this form on Day 1, so you aren’t scrambling for it later.
Form W-9 (Request for Taxpayer Identification Number) verifies your freelancer’s name, address, and Taxpayer Identification Number (TIN), so they can’t dodge the IRS. It also helps you confirm that they’re legally allowed to work in the U.S. as a U.S. resident or citizen.
When you review the contractor’s W-9, make sure they remember to exempt themselves from withholding taxes; they should be filing self-employment taxes on their own.
Step 2: Fill out two 1099-MISC forms
Mark your calendar, because this form comes with deadlines. In January, look at how much you’ve paid the independent contractor over the past year. If you’ve paid them more than $600 within the past calendar year, you’ll need to complete a 1099-MISC form.
This form reports how much an independent contractor earned while working with you. You’ll both need this information to fill out your taxes, so don’t lose it.
In addition, use Form 1099-MISC to report that you made direct sales of at least $5,000 of consumer products to a buyer for resale anywhere other than a permanent retail establishment.
By Jan. 31: Make sure you send the 1099-MISC to the contractor by the last day of January. If that happens to fall on a weekend, you have until the following Monday.
The penalty for missing the deadline ranges from $30 to $100 per form, with a maximum fine of $500,000 per year. If a company completely disregards the requirement to provide a correct statement, they could be hit with a penalty of $250 per form, with no maximum.
By Feb. 28: You’ll have until the end of February to send a copy of the 1099-MISC to the IRS — or submit it by March 1 if you file your 1099s electronically.
Step 3: Only pay invoices
Require your independent contractors invoice you for their fees and reimbursable expenses, and maintain good record keeping habits.
For every 1099 who works for your company, you should have a copy of a contract or engagement letter on file, signed by both parties. It may sound like overkill to require you to have a contract for each independent contractor relationship, but there are some agreements that need to be put in writing. The contract protects both of you in the event of a dispute.
Some issues that need to be addressed in this contract and some terms that need to be included:
- The scope of work, including when the job is to be done, and deadlines
- Amounts and timing of payments, when payments are due, what happens if payments are not made.
- Who owns the work – the contractor or the hiring company?
The most important part of this should be a statement that this person is an independent contractor, not an employee.