Deductions are typically thought of as part of an employment relationship, but they may also be relevant when it comes to engaging with independent contractors. When paying your contractors (1099 workers, freelancers), voluntary or non-statutory deductions[1] are, by definition, not mandated. However, situations may arise – often as a matter of convenience – where a contractor requests that certain expenses the contractor is responsible for be paid by the company and then deducted from their earnings.
Non-statutory deductions that a business may choose to advance for independent contractors include:
Rent: payment for office space, vehicles, tools and devices, or uniforms
Fees: remittance on behalf of the contractor of union dues and memberships and similar fees
Penalties: payment for equipment or property damages caused by the contractor
Clawbacks: recoveries of overpayments previously made to the contractor
Insurance: remittance on behalf of the contractor of occupational accident insurance, general liability insurance, and/or auto insurance premiums
What are the compliance considerations?
Most deductions from independent contractor earnings are considered taxable income, so even though the worker does not receive the full earnings amount because of the deductions, the full “sum” generally still needs to be reported on the 1099-NEC form. You should also make sure that your contractors are aware of and understand any deductions withheld from their earnings and have given their prior consent to these deductions.
Failure by a company to accurately report contractor earnings in a timely manner could result in the imposition of penalties and interest. Underreporting earnings could also cause workers to pay less taxes than they actually owe, potentially leading to penalties and interest assessed against them as well.
How can technology help?
WorkMarket® is a freelance management system that helps you efficiently and compliantly onboard, manage work assignments, and pay independent contractors at scale. We help you withhold non-statutory deductions from contractor earnings by incorporating them into our invoicing and payment process (note that WorkMarket does not currently handle remittances to agencies). Leverage automation to schedule and track deductions, helping you keep accurate records for compliance/auditing purposes. At year-end, WorkMarket will also furnish and file 1099-NEC forms on your behalf, helping to ensure that the correct amounts are reported on the form based on prior year earnings and deductions.
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