Published on: February 3, 2020 Last modified: August 15, 2020

Reporting Contractors: What Is Non-Employee Compensation?

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    If you own a business, you might use interns and contractors on occasion.

    If you use these types of workers, you need to know how to report this income to the IRS.

    Using contractors or other forms of help and paying them is what’s known as non-employee compensation.

    Read on to learn more about how this affects you and your business and what it involves so you can be sure you’re filing correctly.

    coming to an agreement

    Understanding Non-Employee Compensation

    When you pay an independent contractor, this is referred to as non-employee compensation.

    It can include payments like fees, awards, commissions, and prizes that you give in exchange for their services.

    These wages are different from standard employee wages, and you will not withhold taxes from the worker.

    Before you pay someone and report these wages, it’s crucial to determine whether they are a direct employee or an independent contractor. 

    If you don’t determine the person’s status before you file your taxes, you may be responsible for several items.

    This includes paying back wages, taxes, and even court fees and other penalties.

    A worker who plays an integral role in the business, and they receive benefits from you; they are likely considered an employee.

    An independent contractor typically uses his or her own tools and equipment, and they may also advertise their services and work for other companies simultaneously.

    Contractors also determine their own rates and wages as opposed to an employee where you dictate their hourly or monthly rates.

    Businesses that don’t pay benefits to a worker who provides them with services are likely claiming the worker as an independent contractor.

    This can even apply if the person works for you full-time, as long as they are not considered a direct employee.

    Taxes and Paying Non-Employees

    Once you classify your workers, it’s imperative that they know how to handle their taxes.

    If you are not having people file a form W-4, the non-employee will receive a 1099-MISC form at the end of the year.

    As an employer, you withhold taxes from your employees’ wages.

    A non-employee must pay their own self-employment taxes per the current IRS guidelines.

    There are different tax rates for employees and independent contractors.

    You are responsible for making sure you withhold the correct amount for your employees.

    For Contractors

    For contractors, you’ll need to keep a record of how much you pay them throughout the year.

    When the calendar year ends, a 1099-MISC form is given to your non-employees so they can use it to calculate their income and pay taxes on their own.

    You will not be responsible for paying FICA or other portions of federal taxes.

    The contractors you use are directly responsible for paying their own self-employment taxes based on current rates.

    They should be paying the IRS on a quarterly basis to avoid fees and penalties.

    They’ll rely on the information you provide to help determine what their income was for the year and each quarter.

    The self-employment tax that your contractor pays goes toward Medicare and Social Security.

    Their rates may be higher than the rates you pay your employees since they have no employer directly who files on their behalf.

    itemized tax deductions

    Filing the 1099-MISC Form

    Any independent contractor that you’ve paid $600 or more for the year will need to receive a Form 1099-MISC, which stands for miscellaneous income.

    The contractor should complete a W-9 form and give it to you.

    The W-9 is the Request for Taxpayer Identification Number and Certification, which tells you their name, their Taxpayer ID number, and address.

    This information is transferred onto the form 1099-MISC.

    When you complete Form 1099-MISC, enter the non-employee compensation amount in Box 7.

    This amount will be the total amount you’ve paid them for the entire calendar year.

    Once you’ve completed the form, give a copy to the independent contractor, one to the IRS, and one to your state tax department if applicable.  Keep a copy for your records, too.

    When to File

    This form should be received by everyone no later than January 31 of the following year after payment.

    If you file Form 1099 with the IRS, you will also need to file Form 1096 and submit it to the IRS and state tax department with your 1099-MISC form.

    Remember, it’s essential that you not withhold taxes from any non-employee workers or contractors.

    For employers who fail to submit these forms, the penalties can vary.

    In general, you will receive a set penalty per form that you fail to submit with a maximum of $500,000 per year. 

    Failing to report income to non-employee workers is considered paying someone “under the table,” which is illegal.

    Always make sure you’re keeping thorough records and that you submit your forms to the IRS before the deadline.

    Not only can your business be penalized, but the contractor can also be penalized for failing to report their income.

    Non-Employee Payments Made Simple

    As long as you keep thorough records, non-employee compensation should be a simple process.

    Make sure you’re submitting all of the required paperwork on time and that your contractors get what they need to file their taxes.

    Using independent workers can benefit your business and can give you more flexibility in terms of billable hours and benefits.

    When in doubt, consult a tax professional or tax attorney who can help walk you through the process.

    If you need help with your business tax filing or any other tax-related issue, contact our team of professional attorneys today!

    Are you Being Audited by the IRS?

    Get the answers you deserve, speak with a Tax Attorney today!

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