Working With Independent Contractors? Minimize Last-Minute Tax Headaches With These Tips

The tax implications that come with hiring independent contractors require special considerations–both when you hire and pay workers as well as when you’re preparing for tax time. Making the right moves up front and throughout the process can minimize last-minute stress.

Minimize Last-Minute Headaches by Following These Tips When Engaging Independent Contractors

1. Make Accurate Worker Classification a Priority: One of the foundational decisions when engaging workers is always going to be how you classify workers. This dictates how you handle subsequent details, including taxation.
2. Collect Required Paperwork up Front: While companies don’t generally withhold taxes from independent contractors’ payments, they are required to report payments that total $600 or more during the tax year. This requires collecting W-9s from workers and filing either a Form 1099-NEC or 1099-MISC at tax time. As a part of collecting information up front, companies should confirm that each 1099 worker has an appropriate business entity and insurance policies.
3. Keep Accurate Records: Keep accurate records of all payments–including invoices and receipts.
4. Be Aware of State and Local Tax Laws: State and local tax laws may vary. Understand any additional reporting or withholding requirements for any state you engage workers in.
5. Report on Time: Ensure you make payments and report them on time to avoid penalties. The deadline for issuing 1099 forms is typically in January.

When to Consider Engaging a Partner

Many companies find that outsourcing the administrative worker classification and payroll details to capable partners is cost effective and reduces stress. The right partner can also help mitigate compliance concerns and minimize last-minute tax headaches. Sound like something your company could benefit from? Contact us for a free consultation!

The Bottom Line

To prepare for tax time, any company that engages independent contractors should maintain accurate records, stay informed about relevant tax laws, and consult with tax professionals or other partners as needed.