The time has come. You are at the point where you need more hands to help you and your growing business. Whether you need to hire someone to help with projects here and there, or someone that works on more of a regular basis (Ex. a mutually agreed amount of hours or days per week or month), give yourself a pat on the back, your business flourishing! You're killing it!
Let me first explain the difference between a Contractor and a Subcontractor. A Contractor is a person or business that provides a service to your business, such as virtual assistant (VA) services, social media, email management, customer services, etc. A subcontractor is a person or a business you hire to help you with a contract. For example, you have a client that you are proofing a 300-page book and you hire a subcontractor to help you proof the book to ensure you meet the deadline, or proof the entire book themselves. Contractor's/Subcontractor is legally not an employee and has very specific and very different laws. We'll get to this in another post, it is kind of a lot.
Now, what are those 2-things I told you that you to have?
1) IRS Form W-9 Request for Taxpaying Identification Number: This document will provide you with the required information for you to be able to provide the Contractor/Subcontractor a 1099-MISC Form if you pay the Contractor/Subcontractor six-hundred dollars ($600) or more within a 12-month period (January 1st to December 31st). This form is to be completed in full by the Contractor/Subcontractor (you should never fill out the form on their behalf). The form provides you with the Contractor/Subcontractor legal business name, legal individual name, address, entity type, and social security number (SSN), employer identification number (EIN), or Individual Tax Payer Identification Number (ITIN) - (the number input is dependent on the Contractor/Subcontractor's entity type), and their signature. By completing this document, the Contractor/Subcontractor is legally affirming that the information they have input is true and accurate.
2) IRS 1099-MISC Form: This is a legal tax form you will provide the Contractor/Subcontractor for their taxes. You are also required to submit a copy of the 1099 to IRS. 1099s are required to be issued to the Contractor/Subcontractor no later than January 30th of the following tax year. (Ex. You paid the Contractor/Subcontractor $601 in 2019, the 1099 will be issued by January 31, 2020) This form details the amount paid to the Contractor/Subcontractor within the year. Now, you are only legally required to send a 1099 if you pay them $600 or more within a 12-month period, but you can certainly send them one if they were paid less than that. Not providing a 1099 for payments over $600 can carry hefty fines and is not worth the risk for something so easy.
The IRS came out with a ruling that if you paid the Contractor/Subcontractor through a payment processor or with a credit card, that the duty of issuing the 1099 is on those merchants. While this is true, there are two conditions to be met for this to become their duty, which are:
The Contractor/Subcontractor was paid $20,000.00 or more, and;
the $20,000.00+ was paid over 200 or more transactions
If those two conditions are not met, you are the one required to send them a 1099. Now, please reread that again because this ruling has created a lot of confusion and misinformation resulting in fines for the person/business who hired the Contractor/Subcontractor. It is not the merchant's duty or legal requirement to send them a 1099 if both of the qualifications are not met.
If those two qualifications are met, but you have also paid the Contractor/Subcontractor via check, ACH, cash (any other type of payment method other than a card processor or credit card) you have to issue them an additional 1099 to account for the amount paid by one of the other methods. Even if you only paid them $25 via a check, you must send them an additional 1099 for that $25. Yup, go ahead and read that again.
We'll go over the different laws that outline the legal distinctions between an employee and a Contractor/Subcontractor.
Super exciting stuff!! Please note that just because I didn't mention contracts, NDAs, etc that is doesn't mean you don't need them. YOU DO. This post os simply dedicated to these two items.
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This is not legal or tax advice, and is only informational in nature. This blog does it constitute a client-consultant relationship.