Updated September 01, 2023
A 1099 subcontractor agreement is utilized when a subcontractor has been hired to complete a service for more than $600. The contractor must then provide the 1099-MISC form to the subcontractor by January 31st of the following year in which the payment was provided.
How to Use a 1099 Subcontractor Agreement
The following steps should be followed in order to utilize a 1099 Subcontractor Agreement appropriately:
Identify Subcontractor – The contractor should be provided with information regarding their license(s) (if any), history of samples of the subcontractor, customer feedback, rates, etc. This will help the contractor understand if the subcontractor meets the work quality, timeliness and work ethic of the direct contractor.
Prepare the Agreement – Each company or direct contractor should have a standard 1099 subcontractor agreement. This will allow for consistency in the event the Internal Revenue Service (IRS) requests to see additional documentation in regard to all employees’ status or requires a full audit. The subcontractor agreement should encompass the payment structure, payment terms, job details, inability to perform and/or cancellation of the job.
Sign Documentation – The subcontractor will need to sign the agreement, prior to completing any work. In addition, the subcontractor will need to fill out and sign Form W-9 which is then utilized to create the 1099-MISC, which in turns provides the IRS with details on the income that was paid to that subcontractor.
Form W-2 vs Form 1099
Each of these are two separate tax forms that are utilized to identify the type of employee that received compensation from a contractor or entity. The W-2 is provided to employees who directly worked for a corporation and identifies the amount of state and federal taxes that were withheld on behalf of the employee by the company. A form 1099 is provided to subcontractors, who were not directly employed by the company and therefore no taxes were withheld on their behalf for the IRS. The tax rate between a subcontractor receiving a 1099 varies greatly from an employee receiving a W-2, which is why it is imperative they are provided with the appropriate form.
Employment Tax Status
The tax status is determined by the job status and heavily impacts the amount of taxes are paid. Therefore, if an individual is able to set their own hours/work days, has appropriate training and licenses, has multiple clients and completes work on a case by case basis, they are probably a subcontractor and not an employee of the company. If an individual determines that they were misclassified by a company, the individual should contact the Human Resources Department or direct contact they work with. Any company misclassifying employees can face excessive fines and penalties when individuals are not classified correctly. Subcontractors not only pay income taxes but also pay self-employment taxes. Having the appropriate classification is critical in order to provide the appropriate tax documentation to the subcontractors.