With the number of independent contractors on the rise, chances are your business may hire one eventually. Because contractors are not employees, they are convenient to hire for short-term projects or to supplement your regular staff. But because they are not employees, it can be a bit daunting to figure out how to report the contractors you’ve hired.
Maybe you’re thinking of hiring contractors, or perhaps you already have. If so, it’s important to know how this can affect your taxes.
Employee vs. Contractor
It’s usually fairly simple to tell the difference between an employee or a contractor. An employee works for one employer, completes significant training for their job, and receives a paycheck that has already had taxes withheld. As the employer, you usually provide their tools and supplies and dictate when, where and how they do their job.
An independent contractor often has several clients. Each of whom may them the full amount charged for their time and labor. Contractors set their own hours, determine when and how they will complete their jobs, and usually use their own tools and workspace. They are not included in any benefits offered to your employees, such as health insurance or workers’ compensation.
Taxation is the main difference between an employee and an independent contractor. As an employer you are responsible for withholding income, unemployment, and Social Security and Medicare (or FICA) taxes for employees, but you are under no such obligation for independent contractors. They must pay all associated taxes themselves, and usually charge a higher rate than standard employees to accommodate these expenses.
You are required by law to send contractors a Form 1099-MISC (Miscellaneous Income) if you pay them more than $600 in one tax year. These wages must also have been earned while completing work for your business, not for personal purposes. For instance, if you hire a contractor to redesign your business’s website and pay them more than $600, you should send them a 1099-MISC. If you hire a contractor to clean the pool at your personal home, you don’t need to send them a 1099-MISC.
Though it’s not a requirement to send contractors a Form 1099-MISC if you pay them less than $600, we do recommend it. Wages paid to contractors are deductible from your taxable business expenses. Issuing a 1099-MISC to every contractor hired makes tracing those write-offs easier.
If you have questions about hiring independent contractors, give Hacker Accounting a call at 602-375-5251.