Here’s a question from one of my business clients who’s new to business ownership:
What is the amount of money we can pay someone that we can still write off as an expense but not have to file withholding? I heard $800 from someone but that’s hearsay.
-Paraphrased question from a business client; variations of this question come up often with business clients
Let’s get some terminology in place first. When you pay someone as a contractor — not an employee — you don’t “file withholding.”
Withholding is something that applies to employees. With contractors, you simply pay the contractor and don’t worry about any withholdings or payroll taxes.
However, you do have to give the contractor a Form 1099-MISC at the end of the year if you paid them more than $600 in the course of the year (not $800 like my client had heard).
Example:
Joe the Window Washer pays Jimmy $1,000 to help him with one window-washing job. Joe considers Jimmy to be an independent contractor. Joe doesn’t withhold taxes on Jimmy’s pay; he simply pays Jimmy $1,000. At the end of the year, Joe will send Jimmy a Form 1099-MISC reflecting $1,000 of pay.
There are a few other considerations that I won’t go into in this post but that a business should keep in mind:
- The IRS assesses penalties if you’re supposed to give someone a 1099 and you don’t.
- It’s important to know the distinctions between a contractor and an employee, because this is something the IRS audits. If you say someone is a contractor but they’re really an employee, you will have a problem on your hands if the IRS audits you.