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How to Pay 1099 Employees

As the gig economy grows more employers are looking to hire independent contractors (aka 1099 workers). But since paying independent contractors isn’t a walk in the park, many employers are looking for step-by-step instructions. Here’s a breakdown of everything you need to know:

How Do I Pay a 1099 Worker?

This subject is something you will need to discuss in detail with the person you’re hiring for the job. Often, they will have a written contract that stipulates how and when they should be paid. The two most common methods of payment are hourly and by the job or project. Some independent contractors — such as attorneys — prefer to be paid on retainer, which means you pay them a lump sum at the beginning of each month in return for a certain number of allotted hours of work.

When you first engage with a 1099 worker, you’ll also need to consider some additional payment agreements, such as:

  • How often is payment due? Upon receipt of the invoice, net 15 and net 30 days are the most common payment terms.
  • What are the “measurables” or milestones for payment? For example, a “by the job” pay agreement often includes specific deadlines for parts of the project. When each milestone is met, a portion of the pay is released.
  • What happens if the contractor’s work isn’t done on time?
  • What happens if your company’s payments are not made on time?
  • What happens if the work isn’t acceptable or correct?
  • Who is responsible for any revisions to the work? How many revisions are permissible?

These payment terms are just as important as the payment amount, and they should be decided before the person begins work.

Who’s Responsible for Independent Contractors’ Payroll Taxes?

The short answer: Not your company. That’s the clear distinction between a contractor and an employee of your company that we mentioned at the beginning of this article. If your company is submitting payroll tax payments to the IRS and state and local governments, that person must be classified as an employee. A freelance worker, on the other hand, is responsible for paying all of their federal and state and local taxes as well as Social Security and Medicare (FICA) taxes. Since they are self-employed, they’re also required to pay both their portion and the employer’s portion of those FICA taxes.

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What Is Form 1099?

The IRS’s Form 1099 (more formally known as Form 1099-MISC) is used by businesses that have work performed by freelance or contract staff. People who hire workers such as housekeepers, accountants or attorneys — and pay them $600 or more per year — are also supposed to send them a Form 1099 and file the form with the IRS.

W2 vs. Form 1099

In a nutshell, employee compensation is tallied on a Form W-2 and contractor compensation is calculated on a Form 1099. The W-2 also shows how much federal income tax as well as state and local taxes were withheld. Form 1099 doesn’t show withheld taxes because the contractor is responsible for paying those. And that’s where the confusion over whether a person is an employee or independent contractor can set in. We’ll get to that in a minute, but let’s cover the basics before we dive any deeper.

What Information Do I Need to Complete Form 1099?

First things first. Before you can complete a 1099, there’s another form you need to be concerned with if you work with freelancers or other contract labor: That would be Form W-9, Request for Taxpayer Identification Number (TIN) and Certification. The W-9 is the document the contractor provides to your company when they first start working with you. It’s also what you use to report how much you pay them to the IRS.

The W-9 contains the contractor’s business name and address, a taxpayer identification number (either Social Security number or employer identification number [EIN]), tax classification, and their signature. A Social Security number is used if the independent contractor is a sole proprietor of their business, for example a freelance graphic designer who has no employees. The EIN is used by businesses that have employees, such as a janitorial service you contract with. If the contractor doesn’t give you a TIN or provides one that’s incorrect, you can withhold 24% of their pay (i.e., backup withholding) and send it to the IRS.

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