Although hiring companies aren’t obligated to withhold payroll taxes for contractors, since contractors are self-employed and this is their responsibility, the IRS requires hiring companies to report the payments made to contractors and keep records of their working relationship.
Here we provide a checklist of all the forms and documents you need to hire independent contractors legally.
If you decide to hire independent contractors, you’ll need to collect the following documentation:
- Form W-9
- Forms W-8BEN or W-8BEN-E
- Form 1099-NEC
- Form SS-8
- Independent contractor agreement
- Confidentiality agreement (NDA)
- Non-compete agreement
- Non-solicitation agreement
- Invoices
Let’s dive into these tax forms and documents in the sections below.
Form W-9: Collect US-based independent contractor tax information
IRS Form W-9—Request for Taxpayer Identification Number and Certification—is the first tax form needed to hire an independent contractor. Companies that hire contractors use Form W-9 to collect information about the contractor for tax purposes.
The company should send a blank Form W-9 to the contractor to fill out and return upon hiring.
The W-9 form collects the following information about the contractor:
- Name (or their business name, if the contractor is “doing business as”)
- Address
- Tax Identification Number (TIN) (or Social Security Number (SSN) if the contractor acts as an individual)
- Employer Identification Number (EIN) (if the contractor acts as a business entity)
You should only collect Form W-9 once the contractor starts working for the company. If the independent contractor’s information changes, they must submit an updated Form W-9.
The information in the form must be accurate and current since the data will inform other forms, such as form 1099-NEC.
Learn more about Form W-9.
Forms W-8BEN and W-8BEN-E: Collect foreign independent contractor tax information
IRS form W-8BEN—Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting—collects tax-related information from foreign independent contractors.
Think of the W-8BEN like a W-9 for non-US contractors. By filling out Form W-8BEN, the client proves that the person hired is not a US citizen and conducts work outside of the US.
The IRS issues this form but doesn’t require you to submit it. Keep it in your records instead for potential audit purposes.
If the foreign party isn’t an individual, but a business entity, they need to fill out the IRS form W-8BEN-E and submit it to the payer.
Learn more about Form W-8BEN.
Form 1099-NEC: Report contractor income
Form 1099-NEC, which stands for nonemployee compensation, is used by the IRS to determine taxable income acquired by contractors and freelancers. Companies use the 1099-NEC to report payments to each independent contractor within a tax year.
This form used to be a part of Form 1099-MISC, box 7. But as of 2020, Form 1099-NEC is a separate document. A company must submit a form for every independent contractor they paid over $600 in a tax year. Even if the parties haven’t worked together for a year, the company will still need to report any payments made to a contractor if it exceeds $600.
Form 1099-NEC provides details on the following:
- The amount the payer (company) transferred to the payee (independent contractor) susceptible to income taxes
- Any tax withholding that occurred, including the amount and purpose of withholding
The due date for sending the form 1099-NEC to your contractor is January 31 of the following year for the previous tax year.
Learn more about Form 1099-NEC.
Form SS-8: Properly classify workers
IRS Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, helps companies determine whether they’re at risk of worker misclassification. It is not a mandatory document.
The line between independent contractors and full-time employees isn’t always clear, but the penalties for misclassifying workers are severe. Companies and workers can use SS-8 to determine whether their workers should have employee or independent contractor status.
Employers can also use government-provided tests such as the common law test or DOL’s ABC test to avoid employee misclassification. Certain factors, such as having a high degree of control over the worker’s schedule, getting business expenses reimbursed by the company, or working full-time determine employee status and eligibility for employee benefits.
Learn more about the difference between independent contractors and employees.
Independent contractor agreement: Sign a binding contract
An independent contractor agreement is a written contract between an employer and an independent contractor that defines the scope of work arrangement, deadlines, payment terms, and other relevant aspects of the collaboration.
A company should make an independent contractor agreement when hiring freelancers or small business entities, even if the contract is short-term. A written contract is always necessary to protect both sides in the working relationship.
Specifically, the contractor agreement protects both parties from worker misclassification by explaining the details of the contractor’s status. The contract should clarify that the contractor has the freedom to set their schedule, use their tools and equipment, and deliver the work on their terms.
Contractors are not entitled to receive benefits like health care and employer-provided workers’ compensation insurance by law. The contractor will pay their own state and federal taxes, including FICA taxes and unemployment insurance.
The sections of the written contract should include the following:
- The scope of work: a precise description of the work the contractor will perform for the business
- Ownership of said work: the intellectual property owner of the completed work
- Deadlines: the date range in which the contractor must complete the work
- Compensation: Total pay the company will provide to the independent contractor
- Payment terms: The payment method and cadence
- Any additional provisions and information, depending on the local state laws and the policies of the Department of Labor
Get a detailed breakdown of how to draft a written contract and the importance of avoiding contract templates.
Hire anywhere without worrying about local laws, complex tax systems, or managing international payroll.
Non-disclosure agreement (NDA): Ensure confidentiality
A non-disclosure agreement (NDA) between you and the contractor helps ensure the contractor doesn’t share confidential business information with others.
An NDA is the most common restrictive covenant between an employer and a contractor. It can cover specific projects or the entire working relationship between the contractor and the company.
Most companies add on the NDA as part of the onboarding paperwork. Deel’s free NDA feature lets you generate and send compliant NDAs for your contractor right from the Deel platform.
Non-compete agreement: Reduce competition
Non-compete agreements state that the contractor cannot compete with the client (or former client) in the same field. Non-compete agreements usually cover the length of the working relationship and a certain period after the contract ends.
Not all states allow non-compete agreements for contractors as they drive down wages. For example, Maryland and Virginia banned these agreements in 2021.
Non-solicitation agreements: Reduce poaching
Non-solicitation agreements are similar to non-competes but cover different aspects of the business. While the non-compete agreement forbids the employee from working in a certain field, the non-solicitation agreement prevents a former employee from stealing any of the company’s clients. Some companies use this agreement to replace the non-compete prohibited by the law.
Even though most of these provisions come into play only after the client and the contractor have already parted ways, you may wish to have these signed by an independent contractor before you hire them officially. This agreement will align all parties and might even present deal-breakers for some contractors (especially small business owners).
Invoices: Pay independent contractors
Invoices serve as an official transaction record between two parties, in this case, between independent contractors and their clients. Whether the contractor is a freelancer or has a business, they must send invoices to their clients to receive payment for their work.
An invoice should contain the following:
- Invoice number
- Client’s information: name, address, value-added tax (VAT) ID number
- Contractor’s information: name, address (VAT ID number, TIN in case the contractor is a business entity)
- Services provided to the client
- Amount of compensation for those services
- Additional information that affects the total amount (bonuses, deductions, etc.)
Learn more about different types of invoices and the meaning of each invoice element.
Hire contractors quickly and compliantly with Deel
Hiring an independent contractor and managing the relationship and paperwork can be complicated.
With Deel, you can hire foreign contractors in minutes. Deel helps you generate compliant contractor agreements that follow local guidelines and regulations, collect and file the correct forms, documents, and licenses, and offer flexible and reliable payment and withdrawal options.
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