Managing Independent Contractors so taxes and compliance are a breeze

As a business or nonprofit, it’s important to track and manage the paperwork for your independent contractors. While getting all that paperwork sorted can feel like a total drag, it’s easy if you have a few basic principles to go by. I’ve got your back! Let’s dive into what you need to keep track of during the year to make filing those 1099s a breeze come tax season. Ready to simplify your life? Here’s how to stay on top of it all, without the headache.

KEEPING RECORDS

There are a few effective strategies for managing independent contractors to ensure compliance, and maximize productivity with your freelance team.  In order to manage the paperwork for independent contractors, you need to collect the right information, track it and ensure you keep it in a safe place for a certain amount of time.  In the United States, you are required to keep records of contractor payments, including 1099 forms, for a specific period to comply with IRS regulations. However, given several considerations, many businesses follow a best practice of keeping these records for seven years to cover all potential audit scenarios and to simplify record-keeping practices. This also accounts for any state-specific requirements that might exceed federal guidelines

 Here are the general guidelines:

Tax Records Including 1099 Forms: You should keep these for at least three years from the date you filed the return or two years from the date you paid the tax, whichever is later. This is in accordance with the IRS statute of limitations on assessments.

Employment Tax Records: If the payments relate to employment taxes, you need to keep these records for at least four years after the date the tax becomes due or is paid, whichever is later.

However, there are scenarios where you might need to keep these records longer:

If You Owe Additional Tax: If you underreported your income by more than 25%, the IRS can go back six years.

Fraud or No Return Filed: In cases of fraud or if no return was filed, there is no statute of limitations, meaning the IRS can audit indefinitely.

Business Expenses: For business expenses, especially if they involve assets, you might need to keep records for the life of the asset plus the standard three-year period after the tax return is filed for that year.

State Requirements: Some states might have different or additional requirements for record retention. Always check the contractor or employee’s state’s guidelines.

It’s wise to keep these records in a secure, organized manner. Digital records must be kept in safe drives that are password protected and only shared with select staff.  

HAVING THE RIGHT INFORMATION  

Organizations need to ensure the right information and paperwork is gathered for independent contractors to ensure compliance and to protect your company or nonprofit fr To ensure you can file Form 1099-NEC (Non-employee Compensation) easily at the end of the year, here are several key items and practices you should track and maintain throughout the year:

1. Contact Info (most of this is in the contractor’s w9, however, keep an ear out year round in case you hear they have moved or changed any information): 
   • Name and Address: Ensure you have the correct legal name and current address for each contractor.
   • Taxpayer Identification Number (TIN): Collect and verify the TIN, which is usually their Social Security Number (SSN) or Employer Identification Number (EIN), via a W-9 form.
   • Update your records if contractors change their business structure, address, or other pertinent details.
2. Payments- Keep a record of all payments made to each contractor. 
   • This includes:
     1. Dates of payments
     2. Amounts paid
     3. Payment method (check, direct deposit, etc.)
     4. Cumulative Totals: Regularly update totals to know if you’ve paid more than $600 to any individual contractor in a year, which is the threshold for issuing a 1099-NEC.
3. Invoices: Save copies of all invoices or billing statements from contractors.
4. Contracts or Agreements: Keep copies of any contracts or agreements that detail the work scope, payment terms, etc.
5. W-9 Forms: Maintain W-9 forms for all contractors to whom you expect to pay $600 or more.
6. Service vs. Product
   • Nature of Payment: Determine whether payments are for services (requiring a 1099-NEC) or products (which might not require a 1099 unless under specific conditions).
7. Exempt Payees: Know if any of your contractors are exempt from 1099 reporting (e.g., corporations, except for attorneys or medical service providers).

Tips for Ease of Filing

• It’s recommended that you have a record keeping system to manage independent contractor’s paperwork. Use accounting software or maintain a ledger to track payments systematically. Many software options automatically generate 1099 forms at year-end.
  • Automate Where Possible: Use software that can automatically track payments and generate 1099 forms. Less human error
  • Automate Where Possible: Use software that can automatically track payments and generate 1099 forms.

• Deadline Awareness.
  • Contacting contractors in case there has been any changes in their w9 (a month before filing) 
    • Providing 1099-NEC copies to contractors (by January 31).
  • Filing with the IRS (by January 31 if paper filing, or March 31 if e-filing for the year 2025).
  • January 1st – ensure you have the most update w9 and check IRS for any changes in the 1099 filing process
  • By keeping these details well-organized throughout the year, you’ll significantly simplify the process of preparing and filing your 1099-NEC forms at tax time. 

Your nonprofit or organization is responsible for keeping these records straight. The responsibility falls on you to ensure accuracy in these records which is crucial for avoiding penalties or audits.