How to Follow the IRS Regulations for Hiring Independent Contractors

Your company may use independent contractors or freelance workers to complete special projects. According to IRS regulations, these employees differ from permanent staff members because they do not have access to benefits or wage withholding. Your accounting staff must know how the IRS regulations regarding independent contractors to avoid audits and financial penalties. Follow these steps.

Instructions

1. Understand the reasons why a Form 1099-MISC must be filled out for an independent contractor by visiting the IRS Web site (see Resources below). This informational form must be filled out for each independent contractor who makes more than $600 in a calendar year. Depending on the number of contractors you use, you may want to send out Form 1099-MISC to every freelance worker.

2. Work with your accountants to determine how independent contractor funds may affect your company's taxes. Since independent contractors do not have funds withheld during the fiscal year, they are responsible for their own Social Security and Medicare costs. At the end of the fiscal year, taxable wages will not equal gross wages because of independent contractors.

3. Consider online tax software as a way of clarifying IRS regulations for contractors. There are numerous inexpensive programs that allow you to enter contractor data and file tax returns in minutes.

4. Heed state tax regulations when hiring independent contractors. Your state's revenue service may have requirements for hiring employees that are more stringent than federal regulations. State revenue departments typically use these requirements to manage industries that are vital to their state.

5. Track reimbursement and fringe benefits for independent contractors. You can follow the reimbursement of business expenses by keeping receipts filed by employee and fiscal year. Fringe benefits like the use of an exercise center may have no bearing on your company's taxes, but they may effect the compensation for all of your independent contractors.