Payments to Independent Contractors

The gross amount you pay to an independent contractor is deductible. However, since an independent contractor is, by definition, not an employee, you will not report these amounts as wages or benefits. Instead, you would report the payments under the category of expenses for which the independent contractor's services were provided.

If you paid someone to repair, the expenses would be reported under the "repairs" category of expenses. Similarly, if you paid an independent contractor to create brochures for your company, those expenses would be reported under advertising.

Special reporting requirements. If, in the course of a year, you pay $600 or more to an independent contractor, or you pay $600 or more in rents, services including parts and materials, or attorney fees, you must report the payment on IRS Form 1099-MISC.

Give a copy to the contractor by January 31, and send a copy to the IRS by February 28. These rules generally don't apply to payments made to corporations. Form 1099-MISC is a machine-readable form, and you must use the official IRS version (call 1-800-TAX-FORM for a copy) or a pre-approved computer-generated form (software is available in most larger office supply stores).

Warning There are a host of special rules that determine which workers can be considered independent contractors and which must be treated as employees. And, failure to properly classify those who perform work for you can expose you to significant fines and penalties! If you are in the slightest doubt as to which category a worker fits, be sure to read our discussion of the independent contractor rules.