How to pay Independent Contractors in the US – a step-by-step guide

Tammy Weishuhn

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It is important to remember that an independent contractor is a worker who does not work for your company, but is on a contract basis instead. Make sure you have correctly classified your workers before considering paying them as a contractor. In this blog AAB Payroll Inc will focus on how to pay independent contractors in the US, and how to differentiate between them and employees.

Independent Contractor vs Employee

Our recent blog entitled Employee Vs. Independent contractor provides useful information for helping you to classify your workers, so you can be sure to pay independent contractors correctly. It’s important you get this right – if your business is audited by the IRS and mistakes are found, you may be fined and be subject to penalties. 

Who’s responsible for independent contractor’s payroll taxes?

Every independent contractor is responsible for paying self-employed taxes based on their total income from self-employment each year. Because independent contractors are not employees, the company is not responsible for submitting any taxes on the contractor’s behalf.  

Ways to pay independent contractors IN THE US

Compared to paying regular employees, the process of paying independent contractors is simple. One of the reasons is that businesses do not withhold income tax or pay Medicare or Social Security taxes for independent contractors, as they do for regular employees. The most common methods to pay independent contractors are hourly and by the job. This, as well as the rate of pay, should be mentioned in the contract. 

Steps for paying independent contractors IN THE US

The following are forms you may have to file with the IRS when paying an independent contractor. 

Form SS-8: Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding 

If for any reason you do not know the worker’s status, you can ask the IRS for a determination letter. Form SS-8 is used to clarify whether a worker is an employee, or an independent contractor. The employer provides known information about the worker by filling out the form, and in return, the IRS will send the employer a letter giving their opinion on the status of the worker.   

Form W-9: Request for Taxpayer Identification Number and Certification 

Before you hire an independent contractor, you must have a Form W-9 signed by the worker. This form can be used to request the correct name and Taxpayer Identification Number, or TIN. A TIN may be either a Social Security Number or an Employer Identification Number. Submitting this form certifies that the information you are providing is accurate, so be sure to keep these on file for at least 4 years for future reference and in case your business is audited by the IRS. 

Form 1099-MISC: Miscellaneous Information 

Before an independent contractor can receive this form, they must first have completed a W-9 Form. If you pay independent contractors, you may have to file Form 1099-MISC. When a business pays an independent contractor $600 or more over the course of a tax year, the IRS requires the payments to be reported on this form. Form 1099-MISC must be prepared, given to workers, and submitted to the IRS early in the year since it is an annual wage report form.  

Some instances where this form may be needed are: 

  • When there is income earned by an independent contractor. 
  • If there are any fees or commissions that were paid.  
  • If there was any payment for prizes, awards, or legal services.  
  • If there were any medical payments made. 

What if the independent contractor does not provide a valid TAXPAYER IDENTIFICATION NUMBER? 

No federal or state income tax is withheld from the pay of an independent contractor, but there is an exception. If a contractor does not have a TIN or has provided an incorrect one, you must enforce backup withholding on their payments, which is withheld at the rate of 28%.  

Help with paying independent contractors IN THE US

If you still have questions about how to pay independent contractors in the US, our expert payroll team based in Grand Rapids, Michigan can help.  

Arrange a free, no-obligation payroll software demo to see how outsourcing your payroll could be of benefit to your organisation. 

Tammy Weishuhn - author of How to pay independent contractors

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