Independent Contractor Paperwork: Everything Employers Need to Know
If you’re considering working with self-employed pros, you already understand how they offer diverse perspectives, flexibility, and expertise for your small business. However, managing independent contractor paperwork and ensuring it’s completed on time may seem like a lot to handle!
Check out our breakdown of the essential documentation you should collect for most self-employed professionals you hire, including W-9s, 1099s, and the crucial Certificate of Insurance (COI) to ensure smooth and compliant partnerships.
Understanding Form W-9
When it comes to independent contractor paperwork, Form W-9 is a foundational document. You need it to collect essential information from your 1099 contractors, such as their name, address, and taxpayer identification number (TIN).
Note that a W-9 differs from:
Form W-2, the wage and tax statement which you must file for each employee
Form W-4, which each employee fills out with their income tax withholding selection
A W-9 requests different information since you won’t need to withhold payroll taxes for freelancers or contractors.
Who Needs to Complete a W-9?
Any individual or business entity you hire as an independent contractor and pay over $600 during that year should complete a W-9. As an employer, you should request this form from every contractor, as it helps you accurately report payments to the IRS.
Why is a W-9 Necessary?
Although Form W-9 is not submitted to the IRS directly, it’s critical for IRS reporting. This document ensures accurate 1099 filings, which you must submit to report payments made to contractors.
Typically, you should obtain an independent contractor’s W-9 when they begin working for you or before the first payment.
Filling Out Form W-9
Contractors should complete the W-9 accurately, ensuring the information matches their tax records. Once complete, they should return it to you promptly to avoid delays in processing payments. It’s a straightforward form, but you can ensure contractors have filled it out correctly by confirming it includes:
Their full name
Their business name, if they have one
Selection of their business entity type (first box for individuals, sole proprietors, or single-member LLCs; others are for C corporations, S corporations, Partnerships, and Trust/estate businesses)
Exemption codes, if applicable (this section only applies to certain types of companies)
Their correct address
Their Social Security number (SSN) or employer identification number (EIN)
Their signature—you’d be surprised how many people forget to sign essential forms!
Diving into Form 1099
Now, let’s break down Form 1099—this is the one you fill out as the employer. This independent contractor paperwork is required for tax reporting purposes, so be sure you’ve retained and filed 1099s as you prepare for tax season.
What is Form 1099?
A 1099 reports various types of income, including payments made to independent contractors. Again, you’ll have to issue a 1099 to any self-employed individual for whom you’ve paid $600 or more during the tax year and submit a copy to the IRS.
There are now 21 types of 1099 forms, each catering to specific kinds of income (e.g., interest earned on savings, investment dividends, and profits from a real estate sale). However, the 1099-NEC (Nonemployee Compensation) is the most common for reporting payments to contractors for their services.
Why File a 1099?
Simply put, the IRS requires it! Form 1099 is how contractors report their income correctly. You’ll use the contractor’s W-9 to complete their 1099, documenting their annual earnings.
If you fail to collect a W-9 and file a 1099 for a contractor and are subject to an IRS audit, you’ll be responsible for paying a percentage of their taxes and a significant fine! Remember, the deadline for sending 1099s to contractors and the IRS is January 31 for the preceding tax year.
The Vital Role of a Certificate of Insurance
Beyond tax-related documents, safeguarding your business involves acquiring a Certificate of Insurance (COI) from each contractor.
What is a COI?
A COI is a document issued by an insurance company that outlines a contractor’s insurance coverage, including liability and worker’s compensation. It serves as proof that the contractor holds the necessary insurance policies.
Why Should You Obtain a COI from Each Contractor?
Having a COI mitigates risks for your business. Another essential piece of your independent contractor paperwork, it ensures that contractors carry adequate insurance, protecting you from potential liabilities arising from their work. Generally, you want them to have:
General Liability: This is the minimum coverage your contractors should have. It protects against property damage, bodily injury, or advertising injury and covers legal fees, settlements, and medical expenses.
Worker’s Compensation: Worker’s comp covers employees’ medical expenses and lost wages due to work-related injuries or illnesses. It also shields employers from potential lawsuits related to workplace injuries.
Errors & Omissions Insurance: Also known as E&O insurance, this coverage protects professionals from claims of mistakes or negligence in providing professional services, excluding bodily injury or property damage.
Commercial Auto: As the name implies, this covers vehicles used for business purposes against damages and liabilities in accidents. It also covers bodily injury, property damage, and vehicle repairs.
Umbrella Insurance: Similar to a homeowner’s umbrella policy, this offers additional liability coverage that extends beyond the limits of other policies to provide extra protection against catastrophic losses or lawsuits.
Environmental Liability: This policy covers costs associated with pollution-related damages or cleanup, helping businesses manage financial risks associated with environmental incidents or contamination. Note that certain policies cover certain pollutants.
Depending on their industry and requirements, they may not need every kind of coverage. However, some professions, such as construction, involve higher or more specific risks.
Let’s say you’re a general contractor. Your business has its own worker’s compensation and general liability policies to cover your employees. But if one of your subcontractors gets injured on the job and doesn’t have coverage, the claim will hit YOUR worker’s comp—and no one wants to pay more for insurance than necessary!
So, if you undergo a worker’s compensation audit, having a COI lets you easily show the auditor that your subcontractors are insured.
When Should You Request a COI?
Request the COI from every contractor before starting work with them so you can verify that the coverage meets your requirements and remains valid throughout the project.
The contractor should ask their insurance agent for the COI and then provide it to you. They may even be able to ask their agent to send the COI directly to you.
The best rule of thumb for hiring contractors is to require proper insurance. If they don’t have the coverage necessary, you could end up paying significant claims and losses that should’ve been their responsibility!
When you receive a contractor’s COI, look for proof of valid policies, the type of insurance carried, expiration dates, and specifically what/how much coverage it provides.
Doing Your Due Diligence with Independent Contractor Paperwork
Hiring freelancers and contractors provides many benefits, from flexibility to an outside perspective. However, gathering the necessary independent contractor paperwork is vital to protecting your business’s financial interests.
Understanding the nuances of W-9s and 1099s and securing a COI empower you to navigate outsourcing specific tasks and projects confidently. Stay diligent in collecting and filing these documents within their deadlines to maintain compliance and foster a fruitful working relationship with your contractors.
Do you need assistance collecting, organizing, and filing independent contractor documentation as you prepare your 2023 taxes? Book a complimentary intro call today to learn how JLS Accounting can help!