How do I pay a 1099 independent contractor?
So you want to hire an independent contractor? When it comes to payroll, that word doesn’t just mean the hard hats and tool belts kind of guy or gal - it refers to a type of temporary worker you hire at your business.
Not sure if you are hiring a contractor or employee? Check the IRS regulations first. Once you are sure you are bringing on a contractor, follow the steps below.
Have your contractor fill out a Form W-9. This will provide you with all their identifying info. Make sure to keep the W-9 in your records for at least four years, and pay close attention to whether the independent contractor is subject to backup withholding or not (line 2 under Part II), or if the contractor does not supply you with a valid TIN, then you are required to deduct backup withholding from their earnings. Failure to pay backup withholding can leave you responsible for any uncollected tax liability, so it’s important to get right.
Get them the money. Because you are paying an independent contractor you generally won’t be taking taxes out before you give them the money. Some employers choose to write their contractors checks, while others get permission to pay their contractors via direct deposit (note: authorization forms are required!), and some use websites like PayPal to electronically transfer the funds. Many payroll providers can also process these payments as a convenience, as long as you are already using them to pay your employees.
Pay any backup withholding that you withheld to the IRS, and any state taxes that were withheld to the appropriate state taxing authority.
Fill out a 1099-MISC. If you have paid an independent contractor more than $600 in the year this is required. You must also file Form 1099-MISC for each independent contractor from whom you have withheld any federal income tax (and report the backup withholding amount in Box 4 of the 1099-MISC). You will need to provide a copy to your contractor by January 31, and generally must send a copy to the IRS and the state income tax withholding agency by January 31 to stay compliant.
For more information, check out the IRS site, and review the General Instructions for Certain Information Returns.