Key Terms for Contingent Workers
Here is a glossary of key terms related to contingent workers.
- Automated Clearing House (ACH): An electronic network for financial transactions in the United States (parties involved need U.S. bank accounts). ACH processes large volumes of credit and debit transactions in batches. ACH credit transfers include direct deposit, payroll, reimbursements and vendor payments.
- Backup Withholdings: Non-employee compensation for services, royalties, rents, reportable gross proceeds paid to attorneys, and other fixed or determinable gains, profits, or income payments that are reportable on Form 1099 are subject to backup withholdings. Rules require income tax withholding of 28% from payments if the payee is not exempt from backup withholding and fails to furnish a correct taxpayer identification number (TIN). (Not supported in Zenefits.)
- Consulting Agreement: This agreement is used for each of a company's consultants, including individuals and entities providing services to the Company as independent contractors instead of employees.
- Current estimated pay date: The date by which the worker should receive their payment.
- Current limit: The maximum amount that can be paid to contractors in a five-business day period (typically one business week).
- Employer Identification Number (EIN): An Employer Identification Number (EIN) is also known as a Federal Tax Identification Number, and is used to identify a business entity. Generally, businesses need an EIN.
- Foreign Account Tax Compliance Act (FATCA): U.S. citizens, U.S. individual residents, and nonresident individuals or entities who own certain foreign financial accounts or other offshore assets must disclose this information to the IRS.
- Form D542: Any California employer who makes a payment of more than $600 to an independent contractor, or makes an agreement to pay a contractor more than $600, must file a Form DE542 with the California Employment Development Department within 20 days of the payment or signing of that agreement. The form is used to assist state and county agencies in locating parents who are delinquent in their child support obligations.
- Form W-8: This form is used by employers to get information from non-resident aliens who do work and/or earn income in the U.S. or foreign business entities who earn income in the U.S. If adequate documentation is not supplied with a W-8 form, the foreign investor will be subject to the normal rates of backup withholdings.
- Form W-9: This form is used by employers to get information from who they hire as independent U.S. contractors. When a business pays an independent contractor $600 or more over the course of a tax year, it is required to report these payments to the IRS on an information return called form 1099. Businesses use the name, address and Social Security or tax identification number from form W-9 to complete form 1099.
- Form 1099: Tax form that reports the year-end summary of all non-employee compensation. The 1099 form covers self-employment and independent contractor income, royalties, rent, crop insurance proceeds and several other kinds of miscellaneous income. An employer that pays a independent contractor at least $600 during the year must issue a 1099 to them by January 31 of the following year.
- Independent Contractors: The general rule is that an individual or entity is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. Independent contractor classification is governed by both state and federal law and should be carefully evaluated before classifying a worker. Tax filings for these workers are managed by the employer, including 1099s for payment received.
- Non-Disclosure Agreement or IP Assignment Agreement: This agreement is between a company and its contractors, consultants, business partners and employees. It details how a company's confidential information and intellectual property is to be handled. It requires that all confidential information disclosed remains confidential, and that anything created, or improved upon, on behalf of the company will be exclusively owned by the company.
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