5 Things You Need to Know About Contractors and Small-Business Taxes

By Susan Payton

3 min read

If 2015 was the first year you hired a contractor or freelancer, you might be unaware of your responsibilities for tax time. Let’s take a look at what you need to do to ensure you comply with IRS rules and help your contractors file their taxes on time.

1. You Probably Need to Send Out 1099s

There’s a tax form called the 1099 that you need to send to any contractor to whom you paid $600 or more in 2014. A quick look at your accounting system should show you which vendors you hit that threshold with.

You can check out the IRS’ description of who needs a 1099 here, but don’t get bogged down in the descriptions (you likely won’t be reporting fishing boat proceeds, for example). In general, such independent vendors as graphic designers, writers, attorneys, or accountants who were not considered employees (meaning you didn’t pay employee tax on them last year) will need a 1099 document.

2. The Deadline for Sending 1099s Is Rapidly Approaching

You’re actually required to send all 1099 forms to your freelancers and contractors by February 1, and then you need to file with the IRS by February 29 if filing by paper, or March 31 if filing electronically. While there doesn’t seem to be a way for the IRS to enforce that first deadline, missing the second one can trigger penalties.

3. You Can File Online

It took a while for the IRS to go digital, but you can file your 1099s online through its FIRE system. Unfortunately, you have to fill out another form, and fax or mail that one in before you’re eligible to use the online system.

Another option is to go through your accounting software, if it offers 1099 filing. QuickBooks offers an online 1099 filing service, so you can just create and mail or email the forms to your contractors, then electronically send them to the IRS. This is a great option if you’re looking to save time during tax season.

4. Next Year It’ll Be Easier … If You Plan Ahead

If you found yourself unprepared this year to send out 1099s, make next year easier: Send out IRS Form W-9 now and ask your contractors to fill one out so you have their contact information and Social Security numbers for next year when you prepare the 1099s. Then, whenever you hire new vendors you expect to spend more than $600 with, send them the form as well. Scan the forms, and keep them handy so they’re easy to access when next year’s taxes roll around.

5. You Can Be Audited or Fined for Misclassifying Contractors

If you claim a worker as a contractor, but he or she is really an employee in the eyes of the government, it could trigger steep IRS fines or even an audit. There are specific guidelines to what classifies as an employee and an independent contractor. To ensure your workers are properly classified, see our Contractor vs. Employee Wizard or check out our guide to keeping your business safe when hiring contractors.

There are many benefits to hiring a contract worker over a full-time employee, but there are also a number of IRS regulations you must comply with. For a more in-depth guide to taxes when when you employ contractors, see our guide to filing 1099s.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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