Legal and Paperwork Requirements: ICs
There are only a couple of legal requirements you need to meet when hiring an IC.
Get the IC’s taxpayer identification number. The IRS knows that many ICs are paid "under the table," — that is, in cash — and that they either don’t report or underreport those earnings to the IRS. To put a stop to this, the IRS requires those who hire ICs to get a copy of their taxpayer ID — their employer identification or Social Security number that they use on their tax returns. If an IC won’t give you an ID number or the IRS informs you that the number the IC gave you is incorrect, you have to withhold taxes from the IC’s pay and remit that money to the IRS. (The IRS calls this “backup withholding.”) Obviously, you want to avoid this extra chore — and you can, by requiring the IC to fill out IRS Form W-9, Request for Taxpayer Identification Number. If the IC doesn’t have an ID number yet, you don’t have to start withholding until 60 days after he or she applies for one.
Write down your agreement with an IC. Do not hire an IC for more than a very minor project without signing an agreement. You are not legally required to do so, but creating an IC agreement helps you and the IC clarify the terms of your deal, creates a written record of exactly what you agreed upon, and can help convince the IRS and other agencies that you and the IC did not intend to create an employer-employee relationship. Projects that involve the creation of written or design materials, as in designing a website, especially require a written agreement, as the law presumes that the person who creates it continues to own the copyright in it, unless there is a written agreement that states otherwise. At the very least, an IC agreement would include a statement of the services to be performed, the fees, the time period for completion, a statement regarding the working relationship (for example, that the worker is an independent contractor, not an employee), and a process for resolving disputes. For help creating a written IC agreement, take a look at Consultant & Independent Contractor Agreements, by Stephen Fishman (Nolo).
Complete and file IRS Form 1099-MISC, Miscellaneous Income. Form 1099 is very straightforward, and you only have to complete and file it if you pay an IC $600 or more in the tax year. You simply enter identifying information about your business and the IC, then enter the amount you paid the IC in the box marked “Nonemployee compensation.” You must provide copies of the form to the IC no later than January 31 of the year after you made the payment, which gives the IC an opportunity to correct any mistakes in his or her identifying information. You also have to file copies of the form with the IRS and possibly your state taxing authority (you have to file with the IRS by February 28 of the year after you made the payment; check with your state tax agency to find out its filing deadline). When you file the 1099 with the IRS, you must send along IRS Form 1096, Annual Summary and Transmission of U.S. Information Returns. Form 1096 is essentially a cover letter for the Form 1099s, on which you state how many 1099s are being submitted with it. If you are transmitting Form 1099-Misc to the IRS electronically, then a Form 1096 is not required.