As an employer, there may come a time when you decide to hire a third party to take care of an independent or extraneous project. Freelancers or independent contractors often provide a cost-effective, short-term solution to an otherwise costly problem, but paying them can be tricky. While it may be tempting to go off the books, you should follow tax protocol the same way you would with any exempt employee or independent contractor.
Keep in mind that most professional freelancers have been doing their own taxes and filing their own exemptions for long enough that they need little-to-no direction from you. That said, most also understand that you need to cover your bases, so you can usually expect their full cooperation in maintaining your records.
Generally speaking, it is often less expensive and more effective to hire a freelancer or independent contractor for a one-time job that your company is not trained to handle. There are a couple of reasons for this: primarily, the cost of training preexisting employees to perform the task will often be more expensive than simply hiring a professional—even though their hourly rate is undoubtedly higher—and secondarily, you normally don’t have to pay federal income tax for an independent contractor.
The standard of quality associated with field-specific professionals is also a determining factor, but make sure you do your research before committing to a contract just in case.
What is a 1099?
The 1099-MISC is a tax form that documents all the payments you receive from a single person within a year. For example, if you provided $600 worth of work or more for a company, a freelancer would receive one 1099 for that specific client. While the 1099-MISC can cover anything from rent to award money, its most common usage is to account for money earned whilst freelancing.
Freelancers have a bit of a reputation for flying under the radar when it comes to taxes. Maintaining traditional payroll for one person can be a challenge, and the elusive nature of freelancers coupled with inconsistent sources of income can lead to significant errors in their record keeping. The 1099-MISC provides a simple solution: one simply receives a form for every client for whom one works until they’ve accounted for the entire year.
If you do choose to hire a freelancer, you must fill out a 1099 for any work that pays over $600 in one year. It is their responsibility to report the income, however.
Paperwork for Freelancers or Independent Contractors
Though freelancers require less paperwork than your average employee, there are still several documents you will need:
- A W-9 form for taxpayer identification purposes
- A copy of the contractor’s resume or professional skillset
- A copy of the contract
For simplicity’s sake, consider keeping all these documents in a folder dedicated to the freelancer’s job until you conclude your business. While this portfolio isn’t nearly as extensive as a new hire packet, it still functions as such in a legal sense.
We understand that hiring a third party for an internal job can be a confusing and disorienting process. For more information, please call Abacus Payroll at 856-667-6225 today and redeem your no-obligation quote.