What Forms Do I Need to Hire Independent Contractors?

What Forms Do I Need to Hire Independent Contractors? [2022 Checklist]

What forms do you need to hire an independent contractor? Here's your complete checklist of the IRS tax forms & paperwork you need in 2022.

Anja Simic
Written by Anja Simic
January 28, 2022
Contents
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Hiring independent contractors is flexible and cost-effective. Companies don’t provide employee benefits such as medicare taxes, social security taxes, or workers’ compensation to contractors. Also, companies don’t cover payroll taxes or perform tax withholding for contractors; independent contractors pay their own self-employment taxes.

However, the IRS still requires you to report the payments made to contractors and keep records of your working relationship with them. You still need to fill out a few forms–only different ones.

This article gives you a checklist of all the forms and documents you need to hire independent contractors legally. (If you’re looking to recruit independent contractors, check out the linked article instead. Return here when you’re ready to sign a contract.)

What forms do you need to hire an independent contractor?

If you decide to hire independent contractors, 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 each of 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. A company should send a blank Form W-9 to the contractor upon hiring to fill out and return.

The W-9 form collects the following information about the contractor:

  • Name (or their business name, if the contractor is “doing business as”)
  • Address
  • Taxpayer Identification Number (TIN) (or Social Security Number 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, once the contractor starts working for the company. If the independent contractor’s information changes, they will need to submit an updated Form W-9.

The information in the form must be accurate and up to date since the information 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

The 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 they made 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 needs to submit a form for every independent contractor they paid more than $600 in a tax year. Even if the two haven’t worked together for a year, the company will still need to report any payments to a contractor, as long as it exceeds $600.

Apart from the information found in the W-9, Form 1099-NEC provides details on:

  • 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, deadlines, payment terms, and other relevant aspects of the collaboration.

When hiring freelancers or small business entities, a company should make an independent contractor agreement 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 the contractor has freedom and independence, uses their own tools, and works on their own schedule. 

In return, the contractor will not receive benefits like healthcare and employer-provided workers’ compensation insurance. 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 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.

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Non-disclosure agreement (NDA): keep confidentiality

The non-disclosure agreement (NDA) between you and the contractor prevents them from sharing confidential business information with third parties. 

An NDA is the most common restrictive covenant signed between employer and employee. It can cover specific projects or the entirety of the working relationship between the contractor and the company. 

Read more about writing an airtight non-disclosure agreement.

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 a different aspect of 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, present them to independent contractors before they’re officially hired. This will align all parties and might even present deal-breakers for some contractors (especially small business owners).

Invoices: pay independent contractors

Invoices are documents that serve as an official record of a transaction between two parties, in this case, between independent contractors and their clients. Whether the contractor is a freelancer or has their own business, they must send invoices to their clients to receive payment for their work.

An invoice should contain:

  • 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 may affect the total amount (bonuses, deductions, etc.)

Learn more about different types of invoices and the meaning of each invoice element.

Keep your tax paperwork forms and paperwork in order with Deel

Hiring an independent contractor is no small task, considering the number of documents and tax forms it requires. And when it’s time to file tax returns, the challenge grows even larger.

Outsourcing the hiring and payroll process lets business owners build their team, focus on other core aspects of the business, and have peace of mind when it comes to tax and paperwork compliance.

With Deel, you can hire foreign contractors in minutes, cost-effectively, and with minimal effort on your end. The entire employment process gets handled by local hiring experts and you get to automate tax form collection and tax calculations for your whole team in one place.

Book a demo to see how Deel helps you and your team grow.

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