What is Non-Employee Compensation?
Non-employee compensation is a type of income that is not paid to an employee by an employer. This type of income can come from many different sources, such as investments, self-employment, or other sources.
This is the type of compensation you pay to independent contractors who work for your business.
These may include sales, commissions, awards, prizes and other payments made for completing tasks.
Do we have to withhold taxes for non-employee compensation?
No, you don’t, freelancers or independent contractors pay the taxes themselves. You must classify your workers properly so that you can tell if their earnings are considered wages or non-employment compensation.
Who can receive nonemployee compensation?
Independent contractors and other workers who generally are not employees can be paid this type of compensation.
How much control you have will determine non-employee compensation.
Financial control
Would you control the financial aspects of the worker’s job? Employees are paid hourly or weekly. Contractors on the other hand might be paid a flat rate.
Who pays for the worker’s tools or equipment? Is he reimbursed or not? Independent contractors are often not reimbursed but employees are.
Would you allow them to work for other companies?
If you want them to stick with you, then they are most likely employees.
Creative control
If your worker is given the instructions about where they’re expected to work and when then they are most likely an employee.
If you provide ongoing or periodic training on how your work must be performed, then they are an employee.
Contractors normally prefer to work using their own methods.
How you evaluate their performance is another metric. Independent contractors are based on end results of their jobs while employees have other evaluations such as whether they come to the office on time or whether they have met a month’s certain quotas.
Employees have benefits, while contractors only get their pay
Independent contractors typically only get the pay for the job they perform, while employees may have other benefits while they are working inside the company.
How to Pay Contractors
Get their Tax Payer Identification
If they are independent contractors, you must have them fill in IRS Form W-9, this form is used to request their TIN. In this form, you may also expect them to find exemptions and certifications. It generally serves as an arrangement earned from your business.
Talk on payment terms and rate
Would you be paying them an hourly rate? Or flat rate? If it is an hourly rate, then set the terms and conditions. Would they be paid $10 per hour? And how often should they work. If it is not an employee you’re hiring you must still agree to terms and conditions so that they would know how to execute their jobs.
Complete Form 1099-NEC
1099-NEC was introduced in 2020 for reporting non employment compensation. This income would normally reported on the 1099-MISC.
You ought to file 1099-NEC for each worker if these conditions apply
- You’re paying someone who isn’t your employee
- The payment was made to an individual, corporation, partnership or estate
- Payment was made for services rendered in the course of your business or trade
- You paid more than $600 during the year
- Submit 1099-NEC forms to the contractor and the IRS
- You must submit 1099-NEC on or before the first of February.
- Submit Copy A to the IRS and together with Form 1096 if applicable. 1096 gives the IRS a summary of the information you gave on all the 1099 forms you sent to contractors. This form is only used for paper submissions.
- If you file Copy B goes to your contractor
- Copy C is for business records
- Copy 1 is given to your state’s department of revenue
Is it necessary to report non-employee compensation?
Your should report all non-employee payments above $600 a year to the IRS on Form 1099-NEC. If you don’t report it you may get penalties ranging from $50 or $550 per return.
Should employers pay taxes on a 1099 employee?
Those who receive Form 1099 are contractors, not employees. So you are not responsible for paying taxes on their earnings.
If you improperly classify an employee as an independent contractor however, you will be liable to pay employment taxes for that person.
How do I know who is an employee vs. independent contractor?
In general, you have more creative control of where employees work compared to an independent contractor.
Contractors have more freedom over how the job is done and they also pay for their own tools and business expenses. If you are not sure on these classifications, you can request a worker status determination through Form SS-8 in the IRS.
How can I make filing taxes much faster?
You can work with your contractors much easier if you organise your payroll using pay stubs.
Pay stub generators can work great for employers or 1099 contractors who want to keep track of their income and stay on top of tax payments.
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