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How Do I Pay an Independent Contractor?

Payment Options and Withholding Requirements

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Question: How Do I Pay an Independent Contractor?

Answer:

Paying an independent contractor is fairly simple, compared to paying an employee. First, a review of how independent contractors differ from employees:

An independent contractor is a business owner that does work for a company on a contract basis. An independent contractor is not an employee and is not under the direct control of the company. The IRS has several ways to distinguish a worker as an independent contractor or employee. The IRS looks at the general categories of behavioral control, financial control, and the nature of the relationship.

The IRS assumes that a worker is an employee unless you can prove that this person is not an employee. Before you consider paying a worker as an independent contractor, be sure you have correctly classified this worker as an independent contractor. If the IRS or state agencies audit your business and finds that the worker is really a contractor, your business may be subject to fines and penalties.

Options for Paying an Independent Contractor

An independent contractor receives compensation in one of several methods, depending on the agreement set up between your company and the contractor:

  • Hourly. Some contractors get paid on an hourly basis; for example, a computer programmer might get paid for hours worked on programming tasks.
  • By the Job. The other payment alternative is to pay by the work done or by the job. For example, a blogger might get paid by the number of blog posts created. A cleaning service might get paid a set amount for cleaning your office.

In either case, the contract determines the pay rate.

Withholding and Deductions from Contractor Pay
Before you hire an independent contractor, you must have Form W-9 (Request for Taxpayer Identification Number and Certification) signed by the worker. This form identifies the contractor (with a taxpayer identification number) and provides other information necessary for completing income tax forms.

In most cases, no federal or state income tax is withheld from the pay of an independent contractor. There are exceptions,in the case of a contractor who does not have a taxpayer identification or has provided an incorrect taxpayer ID. If the contractor does not have a valid taxpayer identification number, you must impose backup withholding on the payments to this person. Backup withholding is withheld at the rate of 28%.

Employment Taxes and Independent Contractor Pay
You do not need to withhold FICA taxes (Social Security and Medicare) from the pay of an independent contractor. The contractor is independent and is responsible for his or her own self-employment tax payments. No unemployment taxes or workers compensation payments are required for independent contractor workers.

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