Working with independent contractors can create many complications for companies, but the tax breaks often make hiring independent workers worth the hassle. To take full advantage of the benefits of working with independent contractors, here is what you need to know about payroll taxes.
Before you even start thinking about payroll taxes, it’s important to make sure that your workers are classified correctly. Just because it’s better for a company to use an independent contractor doesn’t mean you can just classify people that way at random.
The IRS uses a 20-factor test to determine if someone is an independent contractor or an employee. The test includes questions about whether or not the employer controls the worker’s schedule, supplies their equipment, or controls their work. While each factor is different, the broad theme of each question helps determine whether or not the employer has control over the worker.
If an employer doesn’t have control over the worker, then the worker may be an independent contractor and the employer does not have to pay payroll taxes for that person.
Payroll Taxes for Contractors
Employers are almost always required to pay payroll taxes for their employees, whether they are full- or part-time. The IRS makes almost no exceptions to this rule. The opposite is true for contractors, who pay their payroll taxes themselves through either self-employment tax or their own business taxes. While employers won’t need to pay out money to the IRS for these workers, they still need to report that income with either one of two different forms.
For self-employed independent contractors, companies need to file a 1099-MISC form for every worker who receives more than $600 from the company. For self-employed business owners—people with an LLC—companies need to file a Schedule K-1 form.
Managing Payroll for Contractors
While employers don’t have to pay anything for payroll taxes for independent contractors, managing the reporting can still be a headache. With both employees and independent contractors, employers need to manage two different types of reporting. This can get complicated for a large company or a small HR team.
Outsourcing payroll services is an easy and affordable way to make sure that employees are classified correctly, and their income is reported with the right form. To learn more about payroll outsourcing, contact LBMC Employment Partners today.