![]() As an independent contractor, it’s up to you and the payer to come to an agreement on when you’ll be paid and how that transaction will take place. How Is Independent Contractor Income Paid and Reported?Įmployees typically get paid on a consistent schedule, such as weekly, biweekly or monthly. The IRS considers someone to be an employee if the person who’s paying them to work can control what will be done by that employee and how it will be done. Incorrectly classifying an employee as an independent contractor could trigger a tax penalty. Take note: If you hire people to work for you in your business, you’ll have to decide whether to classify those people as independent contractors or employees. As long as you’re not classified as an employee, you can be considered an independent contractor. You could be considered an independent contractor if you operate as a sole proprietor, form a limited liability company )LLC) or adopt a corporate structure. Independent contractor status can apply regardless of how your business is structured. With that guideline in mind, there are a variety of careers that offer the ability to work as an independent contractor, such as: The key characteristic of an independent contractor is retaining control of how the work they’re being paid to do is performed. You may also be required to file payroll tax returns at the state level for state unemployment tax and worker's compensation insurance, so be sure to check with your state for details on that.Who Qualifies as an Independent Contractor? The most common federal payroll tax forms include Form 941 (quarterly), Form 940 (annually) and Forms W-2 and W-3 (annually). One final comment: if you report any employee compensation on Line 26, you must file several employee-related payroll tax returns on a regular basis. Furthermore, if you pay a contractor $600 or more in a calendar year, you are required to issue him/her a Form 1099-MISC to report the total annual amount of non-employee compensation. And if these people are truly independent contractors, there should be a written contract between the two of you. If you have people that provide services to your business as independent contractors, report those payments on Schedule C, Line 11, Contract labor. The other big mistake is to report independent contractor payments on Line 26. ![]() Any payments you make to yourself out of the business (sometimes called "draw") are considered a withdrawal of profit, not employee compensation. The owner of a Sole Proprietorship is never considered to be an employee of the business. First, never report payments to yourself, the Sole Proprietor. With that in mind, let's discuss what should not be reported on Line 26. The key here is this: whatever you pay your employees should be reported on this line. The IRS has labeled this line "Wages", but employee compensation includes not only wages paid to hourly employees, but also salaries, commissions and bonuses paid to employees. The purpose of Schedule C, Line 26 is to deduct employee compensation. Whether or not you have employees, if you are a Sole Proprietor, it is critical that you properly deduct expenses related to compensation. ![]() The purpose of this article is to help you understand the purpose of Schedule C, Line 26, Wages.
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