How to Pay 1099 Employees
How to Pay 1099 Employees

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.

1099 employee working

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.

Paycor Supports Small Businesses

More than 30,000 medium-sized and small businesses trust Paycor to help them manage their most valuable asset—their people. Paycor is known for delivering modern, intuitive reporting, HR and payroll software, but what distinguishes us is our singular focus on helping business leaders, entrepreneurs and HR professionals make a real difference in their organizations. Take a product tour today to see how we can help you make an immediate, positive impact.

Take Tour

More to Discover

Employee Safety During COVID-19: Compliance Toolkit

Employee Safety During COVID-19: Compliance Toolkit

Vaccines are coming to the rescue, but we’re not out of the woods yet. HR leaders can’t afford to take their eye off the ball when it comes to employee safety and compliance. Now’s the time to think about creating a vaccine policy that works for your organization, and it’s not too late to implement workplace testing. If an employee does test positive for COVID-19, you’ll want to make sure you’re ready to offer the right information and support to your whole team. Paycor is offering this free compliance toolkit, including customizable letter templates to use when you: Create a mandatory vaccine policy Implement workplace testing Inform your team that an employee has tested positive for COVID-19

Demotion Letter Template

Demotion Letter Template

There’s nothing better than seeing employees thrive, but setbacks and slips in performance do happen. One way to address performance problems is a demotion. Sometimes, it’s necessary to take a step back before you can take two steps forward. Download Demotion Letter Template When is a Demotion Necessary? In an ideal world, there wouldn’t be demotions. They are a sign something’s wrong: it could be that an employee has failed to respond to a performance improvement plan or they could just be disengaged. A demotion is the last stop before termination. If you believe the person has potential and is worth investing in, then a demotion might be the best way forward. Demotions are risky, though. You could end up with an employee who is even...

Maximum PTO Accrual Letter

Maximum PTO Accrual Letter

Encouraging employees to use their vacation days can feel strange. After all, nobody wants to leave themselves under-staffed and the rest of their team over-worked. On the other hand, what if employees rarely ever, or even never, take time off? That’s been a question facing business owners this year, as vacation plans were delayed, then cancelled, and PTO built up like never before.One problem is, PTO payout laws can turn unused PTO into an unwanted financial liability. There’s also a risk of schedule chaos down the line as everyone tries to use their days up at once. Most worrying of all is that employees who go too long without a break, even by choice, risk ending up disengaged and burned out. Download Sample Maximum PTO Accrual Letter...

How Long to Keep Payroll Records

How Long to Keep Payroll Records

Running a business, you know that compliance isn’t just about being compliant—you also need to prove it. You never know when the IRS, the DOL or the EEOC will demand to see your paperwork, which is why it’s so important to retain payroll records. To make things more complicated, each agency has its own rules for which documents you have to keep and for how long. The good news is, you don’t have to buy more filing cabinets. HR software can automatically store everything you need, with the added benefit of simplifying the whole payroll process. Why You Need to Retain Payroll Records At a federal level, you’re keeping payroll records primarily for three agencies: The IRS The Department of Labor (Wage and Hour Division) The EEOC These...