How to Report Payments to a Contractor to the IRS
Both business owners and contractors who subcontract work to others must determine whether these workers are employees or independent contractors according to the IRS. This determination will help drive decisions regarding what taxes to withhold from individual payments and which tax forms to complete at year end.
A worker can be classified as an independent contractor for tax purposes only if the person for whom the services are provided controls or directs only the results of the work and not the methods and means of completing the work.
Once the classification is complete, filing IRS paperwork is straightforward.
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Things You'll Need
- IRS Form 1099-MISC, Miscellaneous Income
- Documentation of payments to contractors
- Independent contractor's completed Form W-9, Request for Taxpayer Identification Number and Certification
Instructions
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Complete Form 1099-MISC
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1
Calculate the total payments to the contractor during the tax year. If the payments total $600 or more, you must complete a Form 1099-MISC and submit it to the contractor by January 31 of the year following payment. You must also submit a copy of the 1099-MISC to the IRS by February 28, or by March 31 if the business files its 1099 forms electronically using the IRS's FIRE system.
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2
Complete the payer's section of the Form 1099-MISC, providing the payer's name, street address, city, state, ZIP code, telephone number and federal identification number.
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3
Use the contractor's Form W-9 to complete the recipient's section of the Form 1099-MISC. Include the contractor's name, "doing business as" name, street address, city, state, ZIP code, telephone number and federal identification number.
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4
Complete the "Account number" box if you have more than one account for a contractor for whom you are filing more than one 1099-MISC.
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5
Check the "2nd TIN not" box if the IRS has notified you twice in three calendar years that the contractor has provided an incorrect Taxpayer Identification Number (TIN). If you check this box, the IRS will not send you further notices about this contractor.
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6
Enter total payments to the contractor for the year in Box 7, "Nonemployee Compensation."
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7
Complete Box 4, "Federal Income Tax" withheld, only if the contractor did not provide you with their TIN and you have withheld backup withholding from contractor payments as required by the IRS. Calculate the amount for this box as 28 percent of the amount included in Box 7 and ensure that it agrees with withholdings from payments you have made to the contractor.
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8
Complete Box 16, "State tax withheld"; Box 17, "State/Payer's state number"; and Box 18, "State income" only if required for your purposes or the contractor's purposes. Boxes 16 through 18 are not relevant for the IRS.
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Tips & Warnings
The IRS notes that if an employer incorrectly classifies an employee as a contractor and has no reasonable basis for the classification, the employer may be held liable for employment taxes for that worker.
