Independent contractor taxes: a guide for businesses

If you’re planning to work with an independent contractor, you may be wondering about taxes.

Unlike employees, contractors are generally responsible for filing and paying their own taxes.

However, even though contractors are not employees, you may — in certain countries — still have some tax withholding obligations. In this article, we’ll explain when you’re likely to have these obligations and, if so, what you’ll need to do. 

We’ll also discuss cases in which you may be required to submit certain tax forms, such as 1099s.

So let’s dive right in.

Independent contractor or employee? 

As mentioned, there is a big difference between an employee and an independent contractor — and this significantly affects what your tax obligations are.  

Therefore, it’s important to first determine the exact status of the working arrangement.

There are some crucial distinctions between independent contractors and employees, and these can vary by country. However, in most cases, contractors tend to:

• Operate as self-employed, and provide services to clients

• Have autonomy over how they work and who they work with

• Provide their own tools and equipment

• Choose their own working hours

• Be ineligible for most, if not all, statutory labor protections enjoyed by employees

In terms of taxes, the key distinction is that contractors are generally responsible for managing, filing, and paying their own. This is not the case with employees, whose taxes and social contributions are almost always deducted (or withheld) from their paycheck by their employer.

As a result, when you pay your contractors, you don’t usually need to worry about taxes.

However, there are some exceptions.

When does my business need to withhold independent contractor taxes?

Tax withholding for contractors is an extremely complex area, and can be dependent upon multiple factors including tax treaties between countries. Therefore, it’s not possible to say when exactly you will need to withhold taxes, as each case may be different.

It’s important to be aware of the tax requirements in both your contractors’ locations and your own, and to stay on top of any legislative changes.

This, of course, can be tricky — which is why it’s highly recommended to work with a contractor management platform like Remote. This removes the guesswork, and ensures that you’re fully compliant with local tax and labor laws in all the countries your contractors are based in, giving you peace of mind.

Independent contractor tax forms

In most instances, you may need to submit certain tax forms when working with independent contractors. If your business is based in the US, for example, your tax obligations depend on where your contractor is based.

If your contractor is in the US:

At the start of your working relationship, your contractor will need to fill out and give you Form W-9, which identifies their tax number. Form W-9 is similar to Form W-4, which is filled out by employees when starting at a new company.

If the contractor earns more than $600 in a year from your organization, you will then need to tally up the full amount you paid them (including all fees and commissions), and submit it to the Internal Revenue Service (IRS) using Form 1099-NEC. You must also give the contractor a copy.

Note that, if you fail to submit Form 1099 (or you submit it incorrectly), you are responsible for the consequences — not the contractor. Remote can help you correctly file 1099 forms for your US contractors.

There are other compliance considerations, too. For instance, you must keep each completed Form W-9 in your files for at least four years. 

If your contractor is abroad:

If your contractor is based in a different country, they will instead need to give you either Form W8-BEN (if they are acting as an individual) or W8-BEN-E (if they are registered as a business). This form is hugely important; if you don’t receive it back from your contractor, you may be obligated to withhold 30% of their payment as taxes in the US.

Depending on your contractor’s country of residence, you may also need to submit additional forms to that country’s tax authority.

If the contractor is based in a country that doesn’t have a tax treaty with the US (and the contractor is not a US citizen), then, again, you may have to withhold taxes of 30%.

If you’re working (or planning to work) with foreign contractors, our Contractor Management platform can help you ensure you’re following all the rules.

Independent contractor taxes and misclassification

As discussed, there is a significant difference between an independent contractor and an employee, and it’s vital to maintain the working relationship accordingly. For instance, if you start dictating your contractor’s working arrangements, offering certain benefits, or managing their taxes, the association becomes more akin to an employer/employee relationship than a contractor/client one.

If you treat your independent contractors like employees (or vice versa), you run the risk of misclassification. This can have serious consequences for your business, including:

• Fines

• Penalties and restrictions

• Reputational damage

• Repeat audits

In many countries, authorities are aggressively pursuing organizations that misclassify their contractors and employees, and this is only increasing as more companies hire remotely.

If the nature of the working relationship starts to evolve in such a way, you can offer to convert the contractor into an employee — in which case, you would then become fully responsible for withholding and managing their taxes.

You can learn more about converting contractors into employees in our in-depth, expert guide. In the meantime, if you’re unsure about the status of your working relationship with your contractor, you can use our free Employee Misclassification Calculator to get a clearer picture.

Understanding independent contractor taxes 

As you can see, independent contractor taxes are not clear cut. But it’s still crucial for businesses to understand their obligations in this regard.

This is why it’s recommended to use a contractor management platform, like Remote’s. We simplify your reporting and tax filing, and ensure that you're on top of your tax obligations, wherever your contractors are based.

The platform also allows you to:

• Manage all your international (and domestic) contractors in one place

• Receive and pay invoices in one click — in multiple currencies

• Generate tailored, vetted, fully compliant contracts for specific countries

To learn more about paying and managing your independent contractors, check out our in-depth, expert guide.

Alternatively, try our Contractor Management platform for free! Start your free 30-day trial here, and begin onboarding today.