As the use of contractors and gig workers becomes more and more popular, it is important to understand the best way to handle their tax forms. Failure to handle taxes in a way that complies with the law could lead to costly fines and legal ramifications. Remaining compliant with your extended workforce is critical, but it can also be confusing. In this article, we will outline the basics of how to handle contractor tax forms and compliance in 2023. We will also discuss some accounting strategies that can make tax season a little less stressful for everyone involved!
Disclaimer: This article is for educational purposes only and should not be considered tax or professional advice. For assistance, see a certified public accountant or a qualified tax lawyer.
What is a contractor and why are they used in businesses?
The term “gig worker” is often used interchangeably with the terms “independent contractor” or “freelancer”. The IRS defines an independent contractor as:
“The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. If you are an independent contractor, then you are self-employed.”
Contractors are used in businesses because they provide highly-skilled work without the commitment of full-time employment contracts or hefty benefits packages. Contractors can be utilized on a temporary basis, which allows companies to save money and resources by only paying them when needed rather than having them work full-time. They also bring expertise that might not be available internally within the company and so using contractors can allow companies to get tasks done more quickly and efficiently.
How do you classify a worker as a contractor for tax purposes?
If you want to classify someone as an independent contractor, it is critical that they meet the legal requirements for being classified as an independent contractor. There are a few factors that the IRS looks at to determine whether or not a worker is a contractor for tax purposes.
As mentioned in the IRS’s definition above, a main factor is how much control the company has over the worker. If the company controls what the worker does, when they do it, and how they do it, then they are likely considered an employee. If you want to mitigate risk when it comes to classification, consult with a legal professional or use a contractor payroll specialist like GreenLight that has a dedicated compliance legal team and AI-driven classification engine.
Another great resource for making sure you can classify a worker as a contractor is the ABC test. You can learn more about the ABC test from our article, The ABC Test Explained.
How do you handle tax forms and accounting for contractors in 2023?
Now that you understand a little bit more about contractors and why they are used in businesses, let’s discuss how to handle their tax forms. If you have determined that the worker is indeed legally a contractor, then there are a few things you need to do.
First, it’s critical to get the right contracts, forms, and other documentation filled out before they begin work. Having a safe, streamlined onboarding process helps dramatically with this step.
Full-time employees enjoy a number of benefits and protections that independent contractors and self-employed people typically do not receive. This is why classification is so critical. Contractors are responsible for taxes and social contributions on their own. There is no guarantee of paid time off, sick leave, health insurance, pension, or 401k plan.
However, through companies like Berxi and Human Interest, organizations have the ability to offer these benefits to contractors. GreenLight has partnered with both of these companies to help you become a destination client for contractors.
The Main Contractor Tax Forms: W9 and 1099-NEC
W-9 and 1099 forms are two documents that the IRS requires to be submitted in order to obtain information on contractors for tax reporting purposes.
Form W-9, Request for Taxpayer Identification Number and Certification, is filled out by contractors and is different from Form W-4 which is only for employees. The IRS Form W-9 is a tax form that is sent by you, the client or organization, to the independent contractor working in the United States with whom you intend to collaborate, in order to gather data for tax slips. This tax form is completed by the contractor with their relevant information, like business name, address, and tax identification number.
The Form 1099-NEC is another important contractor tax form, which is sent by the client to the contractor and indicates how much money was paid to the contractor in a single tax year. This form is only submitted once at the end of the year, if the contractor’s services cost more than $600 in a single tax year.
This advice is specific to US-based contractors. Hiring and handling tax forms for foreign entities and contractors from around the world is more complicated, and we recommend using an EOR that specializes in navigating these tricky waters.
What are some tips to make tax season less stressful for everyone involved?
The number one tip for making tax season easier, is to make sure you are classifying and paying your workers correctly from the start. Even if a worker was misclassified in the past, it is best to get them re-classified as soon as possible.
The next way to make sure your tax season goes smoothly is to hire using GreenLight, the world’s first AI-powered classification engine. Our system uses all of the data and industry knowledge at our disposal in order to classify workers with an exceptionally high confidence interval.
If you are looking for a great payroll service provider, then your search starts and ends with GreenLight. GreenLight was built by HR, for HR. We have the best features in the industry because we know that HR managers need more than just Google Calendars to get their jobs done. They need flexible billing cycles, easy to use technology, an incredible and user-friendly experience, and much more.
Schedule a demo today so you can experience all of these key elements in one place and get tax forms for contractors right the first time.