Can You Give an Independent Contractor a Bonus?

Are you planning to reward your independent contractors with a bonus? Find out what the independent contractor bonus clause is and how you can give the contractor an incentive legally.

Anja Simic
Written by Anja Simic
September 27, 2021
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Independent contractor's pay is usually specified in the contract agreement. However, employers can give a bonus to an independent contractor as long as you include the bonus clause in the contract and follow regulations around tax implications and applicable employment laws.

  • Independent contractors can receive a bonus from a company.
  • Independent contractor agreement must include a bonus clause with criteria and a calculation.
  • The bonus system must be clearly distinguished between contractors and (full-time) employees.
  • Fill in the tax Form 1099-NEC if a contractor has received more than $600 in a fiscal year and calculate the total received, including a bonus.
  • Bonus clause, when a part of a written contract, is usually legally binding.
  • Consider local employment law or tax law if the contractor is foreign. 

Summary: Who is an independent contractor?

Independent contractors are workers who offer professional services to companies. They are usually self-employed or small business owners who are contracted to perform services for a period of time, usually on a project basis so their income is typically not regular and may vary from month to month.

The employer isn't required to cover their taxes since they're not on a company's payroll - they file their own taxes and report them to the IRS. Other than reporting all of their taxable income, independent contractors have to report any bonuses that the employer paid them if their income overcomes $600 per fiscal year.

When it comes to the work a contractor performs for an employer, the employer only has the right to control its outcome. According to the Internal Revenue Service (IRS) definition, "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."

Due to the expansion of remote working, many companies are hiring talent overseas as independent contractors, due to numerous benefits this type of hiring has.

We wrote an extensive independent contractor guide with more details if you need a memory refresher.

What is a bonus for independent contractors?

In short, a bonus is something you give to a worker to acknowledge their good performance. Bonuses can come in many different forms, but the most common type of bonus is a payment incentive.

Independent contractors are not full-time employees and so they do not receive the usual benefits, so offering them an additional payment to recognize their work can be a good idea.

However, keep in mind that sometimes the word "bonus" may sound like something that an employee would receive, so consider calling it a payment incentive instead. This also helps distinguish the bonus system you have for your employees.

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Types of bonuses for independent contractors

As we mentioned above, independent contractors can be awarded different bonus amounts (or payment incentives). Some of the most common types of bonuses are, for example:

  • A bonus for completing a project before the deadline
  • A bonus for achieving certain project-based goals
  • A bonus for exceeding the goals
  • A bonus for accepting additional projects, or renewing the contractual agreement

Lookout for misclassification risks

Independent contractor vs. employee

It's very important to understand the legal differences between independent contractors and employees to avoid potential misclassification risks. For every person you hire, regardless of their position, there is a list of obligations you have to follow to stay compliant.

Employment law poses several obligations toward a company hiring employees (full-time or part-time), for example:

  • Withholding taxes from the employee gross salary (or payroll taxes) for social security tax, pension plan, medicare tax, severance packages, business expenses, workers' compensation, and unemployment taxes
  • Regular wage
  • Employee protection under the Fair Labor Standards Act (FICA)

On the opposite, an independent contractor status doesn't allow for any of the mentioned benefits.

If you are giving your independent contractor a bonus, make sure that the contractor doesn't resemble a full-time employee. The IRS is quite strict when it comes to meeting the criteria of a full-time employee, so you don't want to do anything that will put you at risk.

If you want to give an independent contractor a bonus while protecting your business from potential misclassification risks, always make sure that the independent contractor agreement has a clause about it.

Include a bonus clause in the independent contractor agreement

An independent contractor agreement is a document outlining the working relationship between a company and a contractor). It is a legal document that enables both parties involved to cover the base of their working relationship, avoid misunderstandings, and manage expectations. The contract agreement should also cover the scope of work, deliverables, payments, deadlines, confidential information, and any other contract terms.

If you decide to give a bonus to your contractors, make sure to have an independent contractor bonus clause within the agreement. Clearly state the criteria and calculation of the bonus, as it will help manage expectations, but also protect you from the potential misclassification risks.

Keep in mind: The independent contractor's compensation must be clearly separated from the bonus. For example, if an independent contractor agreement specifies that they will receive $5,000 at the end of the contract period, a company cannot pay them $3,000 for agreed work and $2,000 as a bonus. Bonuses imply additional compensation beyond the compensation agreed on per the contract.

Other considerations: laws and regulations

An Independent contractor agreement is usually legally binding, meaning that the offer or a promise of a bonus is binding as well. If the written contract explains the bonus criteria and said criteria are met, it is your legal obligation to fulfill it. In case you don't exercise the agreement, a contractor can file a civil suit against you and the company.

If you are hiring contractor services abroad, it's worth checking the local laws and regulations or seeking legal advice to ensure you are complying with them as well.

Tax from considerations for US companies

As you probably know by now, for each independent contractor who has been paid more than $600 within a tax year, a Form 1099-NEC must be filed. Form 1099-NEC (non-employee compensation) was reintroduced by the IRS for reporting of the 2020 tax year, instead of the Box 7 of Form 1099-MISC.

Learn more about the differences between Form 1099-MISC and Form 1099-NEC here.

This means that if you pay a bonus to an independent contractor, the Form 1099-NEC must reflect the total payment made to the contractor. The total amount being both the compensation and the bonus. If you fail to report this correctly, both you and the contractor are at risk of ax penalties.

If you are working with an independent contractor who has been paid less than $600 within a tax year (including bonus), you don't need to file a Form 1099-NEC.

Giving bonuses on Deel

If you are using Deel and want to give your contractor a bonus, you can do so directly from the platform. All you need to do is add the bonus amount when you are issuing payment. This tutorial shows how to do that.

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