How To Accurately Manage Payroll For Independent Contractors

There are several steps to accurately manage payroll for independent contractors. Independent contractors are often paid differently than traditional full or part-time employees. In fact, companies frequently have to pay employed contractors as a business expense. That means companies must correctly recruit, onboard, and compensate them to avoid financial penalties from the IRS. As a business owner, you’ll need to understand the distinctions between paying regular employees and independent contractors before you write a payable check. Follow these steps to learn how to accurately manage payroll for independent contractors.

Classify Workers As Contractors

First, classify workers to accurately manage payroll for independent contractors. You’ll want to fully understand and evaluate the relationship with your contracted small business team. After all, the classification structure and requirements are not always simple. That’s why the IRS sets specific guidelines to help companies designate workers as independent contractors. The IRS recognizes three common rules to help businesses determine their classification category and structure. Usually, these are based on behavioral, financial, and relationship factors with your contracted team. Surely, classify workers to accurately manage payroll for independent contractors.

Select A Contractor Payment Model

Second, select a payment model to accurately manage payroll for independent contractors. Before any services begin, you’ll want to outline a payment format, rate and frequency with your contractor. You should already have an estimate in mind based on previous jobs, employment length, and competitor rates. Plus, you must think about whether you want to pay hourly or per-project. With these factors in mind, you can start to prepare a formal estimate and written pay agreement with your contractor. Of course, you may want to discuss your contractor’s terms and requirements before finalizing your estimate. Definitely, select a compensation model to accurately manage payroll for independent contractors.

Fill Out A 1099-NEC Form

Next, fill out a 1099-NEC form to accurately manage payroll for independent contractors. You are required to fill out this form for any contractor who is not an S or C corp business entity and receives over $600 in compensation. Of course, there is an exception if you pay your contractors with a business credit card or third party payment platform. Also, you are required to submit a 1099-K form instead if certain thresholds are met. In order to submit the completed forms either via post or electronically, you may need to submit additional forms or obtain a Transmitter Control Code. You must complete and submit form A to the IRS and form B to the contractor by January 31st of the following year. Certainly, fill out a 1099 form to accurately manage payroll for independent contractors.

Submit Backup Withholdings To The IRS

Then, submit backup withholdings to the IRS to accurately manage payroll for independent contractors. Once the IRS sends you a backup withholding notice, follow the provided instructions. Keep in mind that you are not required to do anything regarding tax withholdings until you receive a notice. In the event of the IRS sending you one, you must immediately begin withholding income taxes on your contractors’ payments. In most cases, you will only receive this notice from the IRS if the contractor fails to submit any taxpayer identification number or submits an incorrect one. This number can be submitted using a social security, employer ID or individual tax payer number. Of course, submit backup withholdings to the IRS to accurately manage payroll for independent contractors.

Process Employee Payments

Furthermore, process employee payments to accurately manage payroll for independent contractors. Consider different types of payment and payroll platforms to pay your contractors with. This will make it easier to pay multiple contractors at various intervals. First, link the selected payment platform to your corporate bank account to easily fund all paychecks. Next, create accounts for your contractors. Use a payroll solution that can handle many contractor payments and will have an option to upload their data via a spreadsheet. If your payroll solution has API integration, you should be able to pay your contractors directly through their banking app seamlessly. Surely, process employee payments to accurately manage payroll for independent contractors.

There are many steps to accurately manage payroll for independent contractors. First, classify workers as contractors by following IRS guidelines to assure you will be paying them correctly. Second, select a payment model that is agreed upon with your contractors based on both of your terms. Next, fill out a 1099-NEC form to the IRS and your contractors to make sure all tax forms are done correctly. Then, conduct new hire reporting to your state agency to have your all your workers on file. Furthermore, process employee payments to begin paying your employees for their work on a set pay schedule. Follow these steps to learn how to accurately manage payroll for independent contractors.