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A Beginner’s Guide to Paying Independent Contractors

If you have true employees of your company, whether full-time or part-time, you’ll typically pay them through a payroll system. This will account for tax deductions that both you and the employee are responsible for, and it keeps a nice record of everything for future needs.

But what about paying contractors? What’s the best way to go about paying those who don’t work under your company?

In modern situations, you may sometimes be hiring them through an online platform such as Upwork or 99designs, in which case you’ll also pay them through the website. The necessary records and forms for your taxes should then be readily accessible through there.

Sooner or later, however, you’ll end up working directly with a contractor. If that’s the case, you’ll want to make sure you handle their payment correctly, not just for your sake, but theirs as well.

Set the Terms Beforehand

Before we get into how you pay the contractor, let’s make sure your arrangement starts off on the right foot. When starting with a contractor, you should make sure terms are properly agreed upon. That includes the rate, general estimate, budget caps, additional expenses, etc. Also decide whether the job will be hourly or a lump sum.

The last thing you want to do is get hit with a huge, unexpected bill once the work is done.

You’ll need to determine the frequency of the payments as well. Will there be any cost upfront? Will everything be paid when the job is done? It’s up to you and the contractor to decide.

Have Them Fill Out a W-9

Form W-9 is something businesses need to have contractors fill out for tax purposes. It’s similar in concept to a W-4, except contractors typically won’t have withholdings. Once the W-9 has been filled out, the contractor should return it to you so that you can file it with your taxes in the future.

From there, they can begin work. Once the work is completed and/or pay time comes around….

The Contractor Sends an Invoice

When the time comes to pay the contractor, there’s typically an invoice that they will send once the work is completed. Now, there are exceptions to this. Depending on your arrangement, you may be paying the contractor in regular payments while the work is going, similar to a regular employee’s paychecks.

But for one off projects, the contractor will send usually an invoice. This should include a breakdown of their hours, additional expenses, and a total of what you owe them. You may also want to request receipts and proofs of purchase for additional expenses.

Paying the Contractor

Once you’ve received the invoice from the contractor and decided it’s appropriate, it’s time to pay the contractor. This can be done in whatever method you two have agreed upon. Cash isn’t recommended, however, as it can be difficult to properly record.

Make sure to store the contractor’s invoice and make a note of the payment so you can deduct the cost for taxes. Unlike standard employees, business owners don’t pay FICA taxes for independent contractors.

Because of this, some businesses will pay their employees as if they were contractors. This, however, can be a dangerous game that can get you in trouble with the IRS.

Letting Someone Else Handle Payroll

Payroll, like most financial and tax related items, can be complicated. Whether you’re paying your regular employees, or you want to pay contractors through your payroll system, it’s best left in the hands of someone else.

At LWS, we provide a full range of tax and accounting services, including payroll services in Springfield, Ohio. Whether you have a few questions or you’re ready to get started, we’d love to chat. Contact us today.

Posted by admin | in Business Tax, Payroll