Millions of new entrepreneurs were brought about by the COVID-19 pandemic's spike in small company and self-employment, and many of them had to pick up money management skills fast, particularly when it came to taxes and pay. Almost five years later, company owners in almost every industry have realized the advantages of collaborating with freelancers and gig workers. They have also realized that there are crucial measures to follow to guarantee adherence to IRS requirements.
While hiring independent contractors offers greater flexibility than hiring full-time staff, there are still important guidelines and tax obligations to adhere to. Managing contractor payments and tax reporting has been lot easier thanks to programs like QuickBooks Online (QBO), but you'll need to make sure everything is set up correctly from the beginning.
Independent Contractor or Employee? The IRS Cares About the Difference
Make sure a contractor meets the requirements to be an independent contractor rather than an employee before you enroll them. The IRS is strict about this distinction, and failing to properly categorize someone may result in fines and unpaid taxes. Generally speaking, employees are subject to business control over both the type of work performed and its method of completion, whereas independent contractors are in charge of how they do their task.
To prevent any potential problems, contact our office if you have any questions concerning the categorization. IRS audits continue to focus heavily on misclassification, so be sure to double-check before moving further.
Setting Up Contractor Records in QuickBooks Online
After you've established that your new recruit is really an independent contractor, you'll need to gather the documentation required to set up their QuickBooks Online records. Here's a detailed how-to:
1. Collect Form W-9:
Contractors are required to fill out IRS Form W-9, which confirms their status as independent contractors and provides their taxpayer identification number (TIN). Since it includes the data you'll need for tax reporting, this is a crucial document.
Since independent contractors are self-employed and must file an IRS Form 1040 annually and pay their own taxes on a quarterly basis, you do not need to withhold taxes from their income.
2. Set Them Up as Vendors:
Navigate to the Expenses tab in QuickBooks Online and choose Vendors. To fill out the Vendor Information window and add the contractor's data, click New Vendor.
To ensure that you have the information you need for year-end reporting, make sure you tick the option that says Track payments for 1099. You can effortlessly monitor contractor payments using QuickBooks Online, which will come in handy when it comes time to submit IRS Form 1099-NEC (Non-Employee Compensation).
3. Track Transactions:
The Vendors list in QuickBooks Online will display the vendor entries that you generate. You may follow each payment you make to them by gaining access to their Transaction List.
Any contractor who receives more than $600 in annual compensation must produce a Form 1099-NEC; QuickBooks may help with this. Sending this form to companies or LLCs that are categorized as C or S companies is not necessary.
How to Pay Independent Contractors
Using your QuickBooks Online software, paying contractors is an easy task. Return to their vendor record and select the down arrow next to New Transaction when they send you an invoice. There are several ways for you to make a payment:
1. Bank Transfer (ACH):
QuickBooks Online offers ACH, which is one of the easiest ways to pay contractors. This approach helps minimize the trouble of writing checks while providing quick, secure transfers.
2. Check:
You may still pay contractors using checks if that's how you'd want. In order to trace the payment for tax purposes, enter it into QuickBooks Online under their vendor profile.
3. Credit Card:
Paying contractors using a credit card is an additional choice that may be entered straight into QuickBooks Online. Earning credit card rewards or controlling financial flow might both benefit from this.
QuickBooks Online will monitor your payments automatically for year-end reporting as you make them, making it easier to create Form 1099-NEC.
Why 1099 Compliance Matters Now
The IRS has begun examining companies that hire contractors more closely in recent years. The IRS believes that accurate worker classification is more crucial than ever since there are a rising number of people working in the gig economy, either full-time or as a means of supplementing their income. Serious fines may arise from misclassifying workers as contractors or from failing to file 1099 forms.
With QuickBooks Online, maintaining compliance is simple and you can easily track payments and create the required tax forms. Use these tools to stay on top of your commitments if you're hiring contractors.
The number of individuals working for themselves and on contracts will probably keep rising far into 2025 and beyond. Maintaining accurate contractor records from the start can help your company stay out of trouble with the IRS and have good working relationships with your contractors.
One of the greatest resources for tracking contractor payments and maintaining compliance with tax reporting obligations is still QuickBooks Online. Get in touch with us at [phone] or [email] if you require any help using QBO.
