Updated: January 12, 2025
Published By:
Jon Davis
Whether you hire employees or contractors, calculating payroll taxes comes with the territory. If you are thinking about farming out work to freelancers, it’s a good idea to be familiar with independent contractor taxes and what your obligations are.
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.
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.
We also have a comprehensive resource on the differences between employees and independent contractors that you may find helpful.
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.
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.
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.
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.
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.
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.
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.
A wealth of resources are available for businesses that choose to hire independent contractors, including the following online options:
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.
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.
Take a tour to see how easy payroll can be.
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.
In general, businesses do not have to withhold or pay any taxes on payments to independent contractors. Independent contractors are responsible for paying their own self-employment taxes. However, if an independent contractor happens to owe back taxes to the IRS, then a company might be responsible for withholding a portion of their paycheck to give to the IRS.
You should promptly consult with your company’s legal or compliance team if your business is concerned about misclassifying employees. If you don’t have a legal/compliance team, consider consulting a tax professional such as a CPA or EA. To avoid potential penalties associated with misclassification, it is important to keep up with both federal and local labor laws and IRS guidelines to ensure your business is accurately assessing each worker’s classification.
Finally, it is a good idea to regularly review employee and independent contractor contracts as needed to ensure they reflect potential updates in an independent contractor or employee’s work responsibilities.
While businesses are not required to offer benefits, such as health insurance, paid time off, retirement and financial planning, and workers’ compensation to independent contractors, some employers choose to do so. Employers that opt to offer retirement plans or other benefits to independent contractors must follow any state-specific rules related to benefits. Even if independent contractors are eligible for some benefits, many have to find health care and retirement plans on their own.
Serving Clients for Over 30 Years
Insurance offered through OnPay Insurance Agency, LLC (CA License #0L29422)
