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Outsourcing
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Article
6: Tax Issues Of Outsourcing
Independent contractors are responsible for paying their own taxes. That means you don’t withhold any federal or state taxes from the payments you make to an IC. Nor do you make any payroll deductions for retirement plans or health insurance.
Contractors who are unincorporated should fill out IRS form W-9. Using the information on this form, you issue IRS form 1099 to every unincorporated contractor if you pay the individual more than $600 during the year.
Adhering to these tax guidelines is not only the legal thing to do, but it will also help you prove the status of the provider as an IC should the IRS ever challenge the working relationship.
If the IRS challenges you, and you lose, the independent contractors you hired may be reclassified as employees. That means you might have to pay all employment-related taxes that the IRS says you should have withheld and submitted to federal and state tax agencies. In addition, you can be tapped for the employer’s share of any other taxes, plus the dreaded penalties and interest.
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