In order to take your business to the next level and free up your pesonal time, you will at some point need to outsource part of your workload. You may need to contract the services of a second-shooter, editor, retoucher, graphic designer, or errand-runner but you won't want to pay their income taxes or social security benefits if they aren't your employee. You also won't want to do anything that could later be audited and determined as illegal. The solution? Two very simple tax forms. I know what you're thinking... simple + tax forms = oxymoron. It really is easier than you think, and it's totally worth it to keep your business legit.
First, you will want to collect a W-9 from whomever you pay for their work. It's as easy as printing out the form and making sure you have a completed copy from someone before you start paying them. Here's the form:
W-9: Request for Taxpayer Identification Form. If you are currently paying someone under the table, I would highly suggest asking them to fill out this form before they receive another dollar from you.
You should also make sure that the two of you have a signed agreement concerning the expectations or deadlines of the job as well as any individual or company privacy rights or protections. I may have samples of these for you at a later time, but for now I'm just focusing on making sure you're legit with the IRS.
All year long you should be keeping a record of how much you pay each individual. At the end of the year, if the total amount paid to one individual is more than $600 than you need to fill out a 1099 Miscellaneous Income Form for each individual and provide them with their own copy at the end of the year. (You need their Tax ID, which is why the W-9 form should be collected in advance of payment.) All of the instructions are included within the form and there's always additional help available directly from the IRS.gov website.
Why is it important to document this pay with the IRS? So that you can legally deduct the income you pay independent contractors, so that you don't end up paying income tax on money you never actually earned! Especially when you could put those extra tax dollars into your retirement fund!
There you have it! Two not-too-difficult forms and you've taken care of your responsibilities to Uncle Sam and relieved yourself of paying someone else's taxes! Why didn't anyone tell you how easy it was before? Now go out and get the extra help you need!!
*Special thanks to Carol Drake, CPA; and Nate Reynolds for their contributions to this topic.