It’s wise to use a written agreement when hiring an independent contractor (IC). An IC agreement helps you and the IC clarify the terms of your deal, creates a written record of exactly what you agreed upon, and can help convince the IRS and other agencies that you and the IC did not intend to create an employer-employee relationship. A written agreement is especially important if you are hiring someone to do creative work for you—designing crafts items, for example. Unless you make a written agreement signing the rights of these items over to you, an IC could end up owning the creative rights to the work. A sample IC agreement transferring rights (known as work made for hire agreement) is included in our crafts contracts section.
Legal and Paperwork Requirements: ICs
There are only a couple of legal rules you have to follow when hiring an IC—and they kick in only when the hiring party pays the IC $600 or more in one year.
Complete and file IRS Form 1099-MISC, Miscellaneous Income. Enter identifying information about your business and the IC, then enter the amount you paid the IC in the box marked “Nonemployee compensation.” You must provide copies of the form to the IC no later than January 31 of the year after you made the payment. You also have to file copies of the form with the IRS and your state taxing authority (you have to file with the IRS by February 28 of the year after you made the payment; check with your state tax agency to find out its filing deadline). When you file the 1099 with the IRS, you must also send along IRS Form 1096, Annual Summary and Transmission of U.S. Information Returns. Form 1096 is essentially a cover letter in which you add up all payments you reported on 1099 forms for the year. Resource. Although you can download both Form 1099 and Form 1096 from the IRS website, www.irs.gov, you cannot file these copies. Instead, you must file an original of each, which you can get by contacting your local IRS office (you can find a list of offices at the IRS website) or by calling 800-TAX-FORM. Many businesses find it easier to pay a fee for the services of an online 1099 filer such as Intuit.
Get the IC’s taxpayer identification number. The IRS knows that many ICs work under the table—they’re paid in cash, which they don’t report (or they underreport) to the IRS. To put a stop to this, the IRS requires those who hire ICs to get a copy of the IC’s taxpayer ID—their employer identification number or Social Security number that they use on their tax returns. If an IC won’t give you an ID number or the IRS informs you that the number the IC gave you is incorrect, you have to withhold taxes from the IC’s pay and remit that money to the IRS. (The IRS calls this “backup withholding.”) Obviously, you want to avoid this extra chore—and you can, by requiring the IC to fill out IRS Form W-9, Request for Taxpayer Identification Number. If the IC doesn’t have an ID number yet, you don’t have to start withholding until 60 days after he or she applies for one.