Independent contractors are service providers who work for your company on a contractual basis without being employed within the company. More information on the distinction between an independent contractor and an employee can be found in this article. An independent contractor's compensation is specified within their contract. However, independent contractors can receive bonuses from their clients.
Include Bonus Clause in the Contract Terms
A business must satisfy the terms of the independent contractor's work agreement (contract) in addition to any bonuses issued. For example, if an independent contractor's contract specifies that they receive $5,000 at the end of the contract period, a client cannot pay them $3,000 for regular work and $2,000 for a bonus. Bonuses imply additional compensation beyond the compensation agreed in the contract. When you create a contract, include the criteria for bonuses and calculation or the amount they could receive.
Tax From Considerations
The 1099 Miscellaneous form (1099-MISC) is the tax form a company issues to independent contractors so they can file their taxes at the end of the fiscal year. If they pay a bonus to an independent contractor, the 1099 form must reflect the payment. Otherwise, both parties risk tax penalties. The 1099-MISC form is not necessary if an independent contractor is paid less than $600. This amount included both compensation and bonuses.
It's important to remember that the bonus terms cannot resemble the ones an employee would have. If, for example, an independent contractor is required to be in the office during specific hours to receive their bonus, this may raise red flags with the IRS. If the IRS conducts an audit and makes the case for an independent contractor working as an employee, a business might be required to pay employment taxes and even penalties.
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.