Almost all existing businesses have more than one employee. With the workers comes compensation. It is therefore crucial that you, as a business owner, can correctly determine whether you are working with employees or freelance workers. This will allow you to manage a lot of things including payments, benefits, and more. For this article today, we will be looking at taxes for independent contractors. We have a ways to go, so we better start.
Before you start dealing with payments, deductions and all that, you first need to know what type of employees you will be working with later. Knowing the business relationship between you and your employees will make things faster and less complicated. The worker who performs work for your business may be:
A self-employed person is a self-employed person. You have no control over how they work, although there may be exceptions. What they earn will be subject to self-employment tax.
An employee is someone who provides services to you and your business. Under common laws and rules, you have full control over what they can do while on the job.
Any natural person who works as a public official. Therefore, it is the government that is responsible for the taxes they would pay. This responsibility does not lie with you.
Does my business have to withhold taxes from independent contractors?
Once you are dealing with regular employees, you will be familiar with withholding tax. This concept means that you have to keep income taxes, health care tax, and social security out of an employee’s paycheck. But when it comes to independent contractors, things are quite different, but they could be a little easier. Self-employed workers, freelancers and concert workers do not fall into the same category as regular employees. This means that there is no need to withhold tax on what these people earn. Instead, it would be the worker’s responsibility to pay self-employment taxes and income taxes. Another advantage of having independent contractors is that it costs less to hire them.
Tax forms for independent contractors
Just because you don’t have to pay withholding tax doesn’t mean you no longer have to report anything. This is not the case. You will still need to meet a few conditions.
Form 1099 is for independent contractors who reside in the United States. You don’t have to worry about any documentation as long as the payment is only under $ 599. However, if you are considering a long-term relationship with a worker, you will need to report payments to authorized entities. You will need to perform such a task individually for each contractor you have using Form 1099.
This form is intended for entrepreneurs who reside outside of the United States. It is through this form that government agencies track funds leaving the country.
What about the forms of my self-employed workers?
You will need to collect two main forms from your independent contractors:
This form is for US citizens only. What happens is that your contractors will provide their TIN or a taxpayer identification number. They should also indicate whether they are incorporated or not. This form is your key to have no liability for independent contractor taxes.
This shape is similar to the first. The main difference, however, is that W-8 BEN is intended for non-US citizens. Foreign entrepreneurs must also complete a W-8 BEN form if they operate an industry.
Remember that these forms only last for a good three years. You should therefore inform your contractor of renewals in case you plan to work with him for extended periods.
You can find out all about taxes. But unfortunately, you can’t cover everything on taxes in one sitting. What you can do is visit the Internet for sites and the media. You will have access to thousands of pages that cover it and other related topics. You will have no difficulty looking for a web page or two that have something to do with independent contractors taxes. You can continue your reading and research there.
It is essential that you learn everything you can about taxes from independent contractors. This will allow you to answer all questions regarding payment and taxes once your workers start asking questions.
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