If you’re thinking about farming out work to freelancers, understanding independent contractor taxes and knowing how to 1099 someone should be on your to-do list.
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What you’ll learn
What you’ll learn
Key takeaways
- Independent contractors pay self-employment tax at 15.3% (12.4% Social Security + 2.9% Medicare), instead of having taxes withheld by employers like W-2 employees
- Collect a W-9 form before contractors start work to get their taxpayer identification number (TIN), and file Form 1099-NEC by January 31st for any contractor paid $600 or more during the year
- IC’s are responsible for their own quarterly estimated tax payments if they anticipate owing at least $1,000 in federal taxes for the year, employers don’t withhold taxes for them
In this guide, we’ll cover the basics of worker classification, the forms to know when hiring independent contractors, and the due dates to be aware of.
Employee and contractor differences
First things first, an employee works directly for a company, which generally has control over their work schedule. An independent contractor, on the other hand, is self-employed, works at their discretion, and may be under contract for a specific period of time (and work with other companies). An independent contractor may also be a sole proprietorship, which is an unincorporated business owned and operated by one person.
In a nutshell, both work for your company, but independent contractors have greater freedom and flexibility. In turn, they generally don’t receive perks like health insurance or access to retirement savings plans that regular employees have. Independent contractor taxes also differ from the payroll taxes of employees.
Independent contractor tax obligations and employer responsibilities
So, do independent contractors pay payroll taxes like regular employees do? The answer is yes, but in a different form. Rather than the employer withholding taxes, independent contractors typically pay a self-employment tax on their taxable income.
The independent contractor tax rate, which consists of both Social Security and Medicare taxes for those who work for themselves, is comparable to the Social Security and Medicare taxes that are withheld from the paychecks of most employees. The 2025 self-employment tax rate is 15.3%, which breaks down to 12.4% for Social Security and 2.9% for Medicare.
Before they get started on a new job or project for your organization, you should have the independent contractors you hire complete specific tax forms.
IRS forms required for independent contractors
There are two key Internal Revenue Service forms for independent contractors: the W-9, Request for Taxpayer Identification Number, and the 1099-NEC for reporting nonemployee compensation.
W-9: Request for Taxpayer Identification Number
The W-9, also known as the Request for Taxpayer Identification Number form, provides an independent contractor’s taxpayer identification number (TIN) to the Internal Revenue Service. This IRS form is designed for independent contractors, freelancers, and consultants, not full-time employees, who fill out a different set of IRS forms.
Ideally, the W-9 form should be completed before your company pays an independent contractor. Employers should maintain W-9 forms for a minimum of four years, if not longer.
1099-NEC: Nonemployee compensation reporting
Another IRS form, the 1099-NEC, or Nonemployee Compensation Reporting form, is used to report independent contractor compensation of $600 or more during the year for employers that withhold federal income taxes for employees. This form helps the government track the amount of tax they should expect to receive from independent contractors during tax season.
We also have an article with instructions on to complete Form 1099 if you’re working with contractors, freelancers, and consultants.
Timeline for issuing tax forms
An independent contractor should fill out a W-9 before beginning to work for a company. An employer must file the 1099-NEC at the end of the tax year to report payments. As a general rule, Jan. 31 is the IRS deadline for submitting tax forms for independent contractors.
While the IRS sometimes offers extensions, procrastination is never a good idea for a contractor or a company when it comes to tax time. Companies should have payroll tax forms organized and available to be sure they comply with regulations and meet deadlines.
Navigating compliance with federal tax laws
Employers maintain compliance with federal tax laws by collecting and submitting completed W-9 and 1099-NEC forms for all independent contractors, including consultants and freelance workers. Independent contractors are then responsible for reporting and paying their own taxes.
In addition, independent contractors are typically responsible for making quarterly estimated tax payments if they anticipate owing at least $1,000 in federal taxes for the year. If independent contractors working for your company have questions about paying taxes or estimated taxes, they should consult a tax professional.
Resources for employers hiring independent contractors
A wealth of resources are available for businesses that choose to hire independent contractors, including the following online options:
- The IRS shares comprehensive tax information for businesses as well as a small business and self-employed tax center. In addition, it offers details on the latest rules and regulations for all things tax-related.
- The U.S. Small Business Administration (SBA) has a free online guide for hiring and managing employees, including a section on filing taxes with independent contractors. You can also check with your state’s small business administration or other organizations that support businesses in your state for local resources.
- The U.S. Department of Labor (DOL) details the latest rules and regulations when it comes to classifying employees, paying independent contractors, and more. The DOL also provides information on compliance, employment laws and benefits, and other worker-specific guidelines.
- Indeed, Upwork, and other online job platforms also offer helpful information on the successful hiring and management of independent contractors.
Independent contractors can be an invaluable resource for businesses of all sizes, offering flexibility for busy seasons, affordability, and specific skill sets and expertise. While it may take some time to determine worker classification, payment, and forms, many businesses find it worth their while to welcome independent contractors, consultants, and freelancers to their teams.
Take time to get familiar with independent contractor taxes
Hiring and paying for help comes with specific obligations — from paperwork to proper management of state and federal payroll taxes. For business owners who farm out projects to consultants or freelancers, it makes good business sense to understand how independent contractor taxes work and stay compliant with IRS regulations.
Looking for a simpler solution? OnPay’s payroll & HR software offers seamless contractor payments, advanced onboarding tools, and custom reporting. Wishing your team success and we are here to help if you have any questions.
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Jon Davis is the Sr. Content Marketing Manager at OnPay. He has over 15 years of experience writing for small and growing businesses. Jon lives and works in Atlanta.