How to Pay an Independent Contractor

What is an independent contractor?

Employers occasionally need work done for their business that is outside of their normal scope. Instead of having an employee learn a new topic and spend extra time, and therefore money, learning this topic, the company may want to hire an independent contractor. Independent contractors include but are not limited to graphic designers, lawyers, technical writers, or real estate agents. When an employer decides if a worker is an independent contractor or an employee, they must think about the amount of control they have over the worker. Independent contractors can work when they choose to, meaning they do not have to meet the typical nine to five hours a company employee would have to. As long as the independent contractor finishes the job within the time frame an employer gives them, they can work when they need to or choose to, even throughout the night. An independent contractor also decides the rate at which they are paid. This amount should be agreed upon in a contract before officially hiring the independent contractor.

Independent Contractor Contract

Before a company officially hires an independent contractor, they should have an agreed-upon price for their services. A contract should be drafted stating the terms of their services and the amount the employer will pay them for these services. There are two main ways to consider paying an independent contractor:

• The agreed-upon services are paid for by the hour. This is typical for lawyers, consultants or tutors. Since the services a tutor offers cannot be defined by a goal, the hours needed for a tutor to perform will typically determine the cost of their services.
• The agreed-upon services are paid for by the job. A graphic designer or freelance photographer may be paid by this method. Even though this kind of independent contractor may not know how many hours they need to perform the task at hand, they have prices set ahead of time. For instance, a graphic designer may charge $30 for a professional one-page PDF. Even though it may take them anywhere from 30 minutes to a few hours to create, an employer is only paying them for the final product.

In some cases, an employer may not know the average cost for these services. The employer should request quotes from multiple independent contractors to determine the standard rates.

The costs for these services are generally non-negotiable; however, the official contract should clarify the set price as well as additional charges. For instance, what happens if the graphic designer creates a PDF, and the employer does not like it? The contract should state that minor changes to the PDF are free or cost a small amount. Since the employer chose this independent contractor for the quality of their work, there shouldn’t be any significant changes needed for the final product.

The contract should include a due date or time frame for the independent contractor. Dates and times should be agreed upon by both the independent contractor and employer so that there is no confusion when services are requested. The contract should clarify what happens if the independent contractor does not complete the task before the due date or during the time frame requested.

Some independent contractors require payment, or at least half of the payment, before starting the job. The contract should state how much, whether it is a percentage or flat amount, is due before starting the job, after completion of the job, and after certain milestones, if necessary. 

Form W-9 and Form 1099-MISC

Once the employer and independent contractor agree on the contract and terms, the employer needs to have the independent contractor fill out Form W-9 (Request for Taxpayer Identification Number and Certification). Form W-9 requires the independent contractor to fill out their name, business information, and their social security number (SSN) or the employer identification number (EIN). Once the form is filled out, the employer can officially pay the independent contractor and report earnings to the IRS.

If everything on Form W-9 is correct, the employer can begin paying the independent contractor. They are not required to withhold federal or state income tax since the independent contractor is responsible for paying these taxes, as well as self-employment taxes. However, if the independent contractor fails to submit a completed Form W-9, meaning they did not provide their SSN or EIN, or they submitted a false SSN or EIN, then the employer should immediately withhold 24% of the gross pay from all payments. Withholding the 24% is called backup withholding.

The employer will also need the information on Form W-9 to report payments made to the contractor if the amount total is over $600 for the year. If a contractor is paid $600 or more, the employer needs to fill out Form 1099-MISC stating the total amount the employer paid the independent contractor. Form 1099-MISC must be distributed before January 31 to the independent contractor, the IRS, and the state tax agency, if needed. It is also smart to keep a copy of Form W-9 and Form 1099-MISC on file for future reference.