Can I Pay My Contractors a Bonus?

As we near the holiday season, you are probably starting to plan your annual company holiday gatherings, gifts for customers and colleagues and bonus payments.

If you operate an online business or are just starting out, you probably have independent contractors helping you out instead of employees. These may be your social media agency, accountant or bookkeeper, or a virtual assistant.

While gifts are always a lovely idea to express gratitude for a job well done, you may be more inclined to give a bonus for their hard work. What does this mean for your relationship though? Does this make them an employee? Are you allowed to give bonuses to contractors?

The short answer is 'yes,' you are allowed to provide bonuses to contractors, but you need to keep the below in mind.

CONTRACT TERMS

The ability to be paid a bonus must be outlined in your independent contractor agreement along with how it is determined. You also want to distinguish this bonus program from that of your employees. The more closely you can tie the bonus to a specific performance metric or outcome of a project, the better. You want to demonstrate through your bonus program that this is based on objective performance.

Be careful because a bonus clause in your contract could be considered legally binding. Do not set expectations of guaranteed bonuses or any promises you do not intend to fulfill. Best to consult a lawyer to review this.

If the bonus gives any indication that the contractor has more of an employee relationship, this can cause tax agencies to question their classification and impose penalties and payroll taxes. Pro-tip: Use the term "incentive payments" in lieu of "bonus."

Want more info on the difference between contractor and employee? Listen to our podcast episode all about this.

TAXES Your 1099-NEC that you issue to your contractors (if applicable) must include any bonus payments as well. The contractor must be aware of their responsibilities as a taxpayer as well and know this income will be added to their business income for tax reporting purposes.

Wondering who needs a 1099-NEC? Check out the graphic below as a guide and click on it for more info.

Still not sure if you need to issue a 1099 or if you want to pay a bonus? Shoot me a text at 860-609-6374 and we can help!