Questions Legal

What is non employee compensation?

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Pallavini R

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It is very common that if you are an owner of the small business, you might hire contractors to fulfill the needs of the company and while hiring an independent contractor, a certain amount is paid to him known as non-employee compensation. So what is non-employee compensation?

Non- employee compensation is the amount paid by you to an independent contractor who has performed the work for you. It includes commission, awards, fees, and prizes given for the services. It is a different thing than the reasonable wages of employees. You don’t have to pay taxes for an independent contractor as they are not your regular payroll employees. Before paying an employee, you must make sure that whether the employee is a regular employee or an independent contractor.

There are 6 economic realities determined by Department of Labor (DOL) to see the status of workers. According to DOL, there are specific questions that are to be asked to the worker to know his status:

  • What type of role is played by the worker in the business?

  • The time duration for which the worker has worked in the organization.

  • Do the workers use the tools are his/her own?

  • By whom is the working hour and pay rates decided?

  • Is the worker earning profit out of business?

  • Does the worker have a separate site of business or he advertises independently?

What if the worker has misclassified?

If there is any doubt that the worker has been misclassified then either the worker or you can submit FORM SS-8, to the organization named IRS. This form states that the IRS should review the whole situation and make a decision accordingly.

How is filing for non- employee compensation done?

It is filed with the IRS under the form number 1099- MISC in box 7 of the form and according to the way the non-employee compensation is subjected to the self-employment tax. Any other kind of payment which does not come under self-employment tax and cannot be recorded will be noted in Box 3 of the form as different incomes.

Conditions to enter in Box-7

Any payment made to the worker for $600 or more than that during the same year will come under the category of non- employee compensation. Any payment related to royalty, rent or any other kind of income which does not come under the type of self-employment tax will not be recorded in Box 7 of the form. The box should be filed before Jan 31, and the rest of the amount should be submitted before March 31. Any corrections in the way can be done by not after Aug 31.

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