Paying Contractors: How to Create an Independent Contractor Pay Stub

Do independent contractors need a pay stub? That’s a question you’ll have to answer as more companies rely on contractors instead of hiring employees.

There are between 10-15 million independent contractors in the U.S. and all of them will need to show proof of income for some reason. That’s what an independent contractor pay stub can be used for.

Keep reading to find out when to create an independent contractor pay stub and how to create one.

Pass the Test: Classify Your Employees and Contractors Properly

It’s a changing world, with more and more people opting to become independent contractors. They love the work that they do, but they love the flexibility and freedom even more. In many cases, the freedom is necessary if they have children to care for or an elderly parent.

For businesses, it’s a great arrangement. You get to hire the talent that you need without the huge overhead. You don’t need to pay payroll taxes and benefits. You also don’t have to contribute to unemployment taxes and pay for worker’s compensation insurance, since the contractor assumes those risks.

Since there are so many advantages to hire contractors instead of employees, businesses have turned to contractors for all of their employment needs. The IRS and other government agencies are cracking down because it could infringe on the rights of workers, and the government makes less money in taxes.

States are passing laws to prevent the misclassification of employees. California enacted controversial law AB 1 last year, and New Jersey now has 6 laws on the books targeting misclassification.

The IRS published guidelines to help employers determine if a worker should be an employee or a contractor. Here are the 4 main points to consider.

Degree of Control

This is a tell-tale sign if someone is a worker or an employee. If you set the hours as to when they are supposed to work and dictate things like dress codes, then the worker is probably an employee.

Independent contractors should have a high level of independence over when and how they work. If you try to wrestle control over the work, then you should hire an employee.

The IRS guidelines use behavioral and financial control as ways to test. If you control the behaviors, and you control how and when the person gets paid, then you have an employee.

The Type of Relationship

Are you hiring someone for an extended period of time to do work that is critical to the company? Do you pay insurance or other benefits? Those are signs that you have a worker instead of an employee.

Penalties for Misclassifying Employees

When you weigh the costs and the benefits of having independent contractors or employees, it makes financial sense to hire contractors. Yes, you may be doing something questionable, but you figure that no one will find out.

With that attitude, you’re just asking to get caught. The IRS and state agencies have been cracking down on misclassifying employees and the penalties can be severe. They can be as much as 41.5% of the contractor’s earnings and they can stretch back for three years.

Let’s say you paid a contractor $20,000 a year for the last two years. That’s a fine that can be as much as $16,600. You have to ask yourself if it’s worth it or not.

Creating a Pay Stub for an Independent Contractor

The first question is whether or not a contractor needs a pay stub or a 1099-MISC form? A pay stub gives pay information for a certain time period. For example, if you have a monthly agreement

An independent contractor may need one to prove income. If they’re trying to get a loan, credit card, or an apartment, a lender or landlord will ask for proof of income.

In most cases, they deal with employees who get regular pay stubs with each paycheck. It’s much easier for employees to prove income because they almost always get pay stubs.

Pay stubs for independent contractors are not required by law. However, a contractor may request one from you. It’s up to you whether you provide one or not.

A 1099-MISC form is one that you must supply contractors if they earn more than $600 during the course of the year. Think of it as a W-2 for employees.

A 1099-MISC shows how much a contractor earned for the entire year. This has to be produced by January 31 each year, with a copy sent to the IRS and to the contractor.

A 1099-MISC and contractor pay stubs benefit you. You have better records as to where your money is going and you can pull these records if you’re ever audited by the IRS.

Information for Independent Contractor Pay Stub

What do you need to create a pay stub for an independent contractor? You need their name or their business name, address, and the amount they earned. You also need to document the time period or project the payment is for.

Since you don’t withhold taxes or other deductions, the paystub is very simple and straightforward. You can just use a check stub template to fill out the 1099 pay stub when you cut the checks for your contractors.

By making this a part of your process, you give your contractors peace of mind that they can present proof of income at any time and you have the records you need on file.

A New World for Employers and Contractors

A contractor arrangement works for both contractors and employers, as long as the arrangement follows the law. Contractors and businesses have to maintain good financial records, and an independent contractor pay stub can do just that.

By having documented records as to when the contractor gets paid and for what, there are no questions or accusations of missed payments. Independent contractors also have proof of income that they can use to get a loan or rent a property.

For more financial tips, head over to the Money section of this site.