Independent Contractor Taxes: What Clients Need to Know

When hiring independent contractors in the US, a common question is: “What taxes do I need to withhold for contractors?” The short answer is straightforward—none. Client companies typically do not withhold federal income or employment taxes for independent contractors.

Unlike employees, contractors manage their own tax obligations. However, this simplicity comes with important responsibilities: proper worker classification, accurate reporting through forms like the 1099-NEC, and knowing when backup withholding applies.

Missing any of these steps can lead to IRS penalties, late fees, or compliance gaps that slow down your operations.

This guide breaks down exactly what you need to know—what forms to collect, how to report contractor payments, and how to streamline tax processes for independent contractors.

You’ll also see how Deel’s contractor management and Contractor of Record services simplify how you hire and manage independent contractors.

How to classify workers for tax compliance

Correctly identifying whether a worker is an independent contractor or an employee is the foundation of tax compliance.

The IRS evaluates worker status using three primary control factors:

• Behavioral control: Examines whether the business directs how work is performed
• Financial control: Considers who provides tools, covers expenses, and determines how the worker is paid
• Type of relationship: Looks at written contracts, benefits, and the permanency of the working arrangement

The IRS considers an independent contractor, also known as a 1099 employee, to be someone whose client controls only the outcome of work, not the methods used.

Here is a quick breakdown of the differences between an employee and a contractor.

If you prefer not to take on the risk of evaluating and engaging contractors yourself, Deel Contractor of Record (COR) hires and onboards contractors on your behalf, absorbing all misclassification risk.

For companies hiring contractors directly, Deel Contractor management platform offers an AI-powered Worker Classifier to determine employment status before onboarding contractors.

Discover how Tiqets hired international contractors through Deel, stayed compliant, and avoided misclassification risks without relying on in-house legal expertise.

See also: Self-Employed vs. Independent Contractor: Know The Difference

Tax withholding obligations for independent contractors

You do not need to withhold federal income tax or employment taxes (Social Security and Medicare) for independent contractors. They handle their own tax payments.

Tax withholding applies only to employees. It refers to the portion of wages you deduct and send to tax authorities before paying net wages.

For employees, you calculate and remit these amounts during the year. For contractors, you pay the full amount owed, and they set aside and pay their own taxes directly to the IRS.

Even though you don’t withhold taxes for contractors, you still have reporting duties. You must document payments and submit the required year-end forms so the IRS can track contractor income.

See also: How to Be an Independent Contractor

Required tax forms for clients

Staying compliant when working with independent contractors requires collecting and filing two key forms—Form W-9 and Form 1099-NEC.

Form W-9: Request for taxpayer identification number

Before processing the first payment to a contractor, collect a completed and signed W-9. This form captures the contractor’s legal name, business name (if applicable), address, and either a Social Security Number or Employer Identification Number.

The information on the W-9 is critical for preparing the annual Form 1099-NEC. Without a valid W-9, you risk filing incorrect reports, which can trigger penalties and backup withholding requirements.

Form 1099-NEC: Reporting nonemployee compensation

Form 1099-NEC is used by businesses to report payments of USD 600 or more made to independent contractors in a calendar year. This threshold is expected to increase to USD 2,000 in 2026. It’s filed annually.

You must file Form 1099-NEC with the IRS and provide it to the contractor by 31 January of the following year. The USD 600 threshold applies to the total payments made to a single contractor over the course of the year, not to individual invoices.

Certain payments are exempt from 1099-NEC reporting. For example, payments made to corporations (except for legal and medical services) generally do not require a 1099-NEC.

Payments made through third-party settlement organizations, such as PayPal or credit card processors, are also excluded, as these platforms issue their own reporting forms.

Review IRS guidelines annually to understand current exemptions and filing requirements. It’s also important to keep copies of contracts, invoices, W-9s, and filed 1099-NECs for at least four years to support compliance during IRS reviews.

Deel’s contractor management platform handles tax documentation automatically, so you don’t have to track changing contractor laws.

It issues and collects the correct forms based on each contractor’s location, files them with the appropriate authorities on your behalf, and stores everything in a centralized dashboard for easy access during audits.

When and how to handle tax withholding for contractors

Although client companies generally do not withhold taxes from contractor payments, there are specific situations where withholding is mandatory. The most common scenario is backup withholding.

What is backup withholding?

Backup withholding is a federal rule that requires you to withhold tax from contractor payments when the contractor’s details are missing, incorrect, or under IRS review.

The backup withholding tax rate is currently 24%.

Situations requiring backup withholding

The most common triggers for backup withholding are:

• When a contractor submits a W-9 with an invalid or missing TIN. If the IRS cannot match the name and TIN provided, it may send a notice (known as a "B notice") instructing you to begin backup withholding
• If the IRS determines that a contractor has underreported income, it may require backup withholding on future payments
• When a contractor fails to certify on Form W-9 that they are not subject to backup withholding

When backup withholding applies, you must deduct 24% from each payment, remit the withheld amounts to the IRS, and report the withholding on the contractor’s Form 1099.

Here’s a quick breakdown of the actions required.

Backup withholding continues until the contractor provides correct information and the IRS confirms the issue is resolved. It’s important to document all backup withholding actions for compliance purposes.

See also: How to Register a Sole Proprietorship in the Philippines

Client reporting and payment deadlines

Meeting IRS deadlines is critical to avoiding penalties and maintaining compliance:

• Before first payment: Collect a completed Form W-9 from each contractor
• 31 January: File Form 1099-NEC with the IRS and provide a copy to each contractor paid USD 600 or more in the prior calendar year
• Quarterly (if applicable): Remit any backup withholding using the same deposit schedule that applies to your payroll taxes
• Annual: File Form 945 to report total backup withholding for the year, due by 31 January

Late filings or payments result in penalties. For example, filing a 1099-NEC up to 30 days late triggers a USD 60 penalty per form. The penalty increases to USD 340 per form if you file after 1 August or fail to file entirely. Cases of intentional disregard attract a USD 680 penalty per form.

Using automated contractor management platforms like Deel reduces the risk of missed deadlines. When you pay contractors through Deel, the platform tracks payment totals, alerts you when a contractor reaches the USD 600 reporting threshold, and prepares and files the required 1099-NEC forms on time.

If backup withholding applies, Deel automatically applies the correct rate. It withholds and remits the required amounts and records each withholding event for accurate year-end reporting.

Independent contractor tax responsibilities

Client companies don’t withhold contractor taxes, but contractors still have tax responsibilities. Cover this during onboarding to avoid confusion later.

You can also provide support by providing clear payment documentation, issuing 1099-NEC forms on time, and directing them to reliable IRS resources that explain their tax obligations.

Self-employment taxes explained

Self-employment tax is the tax independent contractors pay to cover both the worker and hiring companies’ portions of Social Security and Medicare, totaling 15.3% of net earnings.

It applies in addition to regular income tax and is calculated on the contractor’s net profit from self-employment, which is gross income minus allowable business expenses.

The 15.3% rate breaks down as follows:

Contractors report and pay self-employment tax on Schedule SE, filed with their annual Form 1040. They can also deduct the employer-equivalent portion of this tax (half) as an adjustment to income, which helps reduce their taxable income.

Quarterly estimated tax payments

Quarterly estimated tax payments are advance payments contractors make to the IRS to cover income and self-employment taxes. Since these taxes aren’t withheld from their earnings, contractors must prepay them in installments to avoid a large year-end bill and potential penalties.

Estimated tax payments are due on the following schedule:

Contractors calculate their quarterly estimated taxes using Form 1040-ES, which includes worksheets to project annual income, deductions, and expected tax liability.

If they underpay or miss these quarterly payments, they can face penalties and interest, even if they pay the full amount when filing their annual return.

Business expense deductions for contractors

Business expenses are costs contractors can deduct from gross income to reduce taxable earnings. Common deductions include home office expenses, equipment, mileage, software, professional services, and business travel.

Contractors report income and expenses on Schedule C (Form 1040), which calculates net profit or loss from self-employment. To claim deductions, individuals must keep accurate records, including receipts, invoices, mileage logs, and proof of business use for mixed-use items such as vehicles.

The IRS may disallow deductions if records are incomplete or if expenses are not “ordinary and necessary” for the business.

Some deductions, such as the home office deduction, have specific eligibility requirements. A home office deduction only qualifies if the space is:

• Used exclusively for business
• Used regularly for business
• The contractor’s principal place of business

Contractors can use either of two calculations for the home office deduction:

• Simplified method: Deducts USD 5 per square foot, up to a maximum of 300 square feet. The maximum allowed deduction is USD 1,500
• Regular method: Applies the percentage of the home used for business to actual expenses like mortgage interest and repairs

Employers do not need to track contractor expenses, but understanding common deductions helps you set clear project terms and agree upfront on which costs each party is responsible for.

When you manage contractors through Deel, they get access to bookkeeping tools that help them keep their finances and taxes organized. These include an invoice generator, expense tracker, and a marketplace of verified tax experts.

This support simplifies tax tasks for contractors and reduces the risk of compliance issues on their side, which helps your projects run more smoothly.

See also: Do You Need an Independent Contractor License to Work?

Tips for employers on contractor tax reporting

Staying compliant with independent contractors requires maintaining consistent processes, ensuring accurate documentation, and being aware of relevant IRS rules. Below are key tips on how to avoid tax penalties with contractors:

• Review classifications regularly: Evaluate worker status annually or when roles change to ensure that contractors continue to meet IRS criteria. If classification is unclear, file Form SS-8 with the IRS to request an official determination
• Document classification factors: Record the specific elements that justify contractor status
• Collect W-9s before payment: Make W-9 collection part of onboarding and verify that all fields are complete
• Use written contracts: Define scope, payment terms, and the independent nature of the relationship in signed agreements
• Track payments and deadlines: Keep organized records of payments, W-9s, and 1099-NECs, and set reminders for filing dates
• Retain documentation for four years: Store contracts, invoices, tax forms, and correspondence in case of an audit
• Automate compliance where possible: Use platforms like Deel to centralize contractor management and automate form collection and filing
• Educate managers and hiring teams: Ensure decision-makers understand classification rules and reporting obligations
• Monitor IRS updates: Review annual IRS changes and adjust internal processes accordingly

See also: Terminating an Independent Contractor: How to Do it Compliantly

Manage tax obligations for your contractors with Deel

As your global contractor workforce grows, so does the risk of noncompliance. Deel helps you stay ahead of tax requirements. Through the platform, you can track reporting thresholds, collect and file the right forms, and keep documentation organized for year-end filings.

If you’d rather not manage these obligations yourself, Deel’s Contractor of Record service takes on the compliance responsibilities for you. It absorbs the risks that would otherwise sit with your team.

Book a demo to see how Deel streamlines contractor management and simplifies tax compliance across your workforce.