Taxes and Outsourcing

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Questions commonly asked about outsourcing and income taxes address who’s responsible for paying them, how they’re reported, and what can be written off. Here’s what you should know and take advantage of this year.

Who Pays Taxes in Outsourcing

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In any contracted working relationship, the service provider is responsible for paying his or her own income taxes. Only when an individual is employed as an employee, is the hiring entity responsible for withholding federal and state income tax from that employees’ wages. This includes Social Security and Medicare taxes, and other expenses as well.

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With outsourcing, those responsibilities are passed on to the service provider. There are a few things outsourcers are still expected to do, however, which demonstrate their exemption from collecting taxes from their providers.

The 1099-MISC and Form 1096

Even though you, as an outsourcer, are exempt from withholding employee taxes, you’re still required to issue each provider, whom you paid more than $600 (in one year), a 1099-MISC form. You not only have to give them this form before the last day every month of January, you additionally must send the IRS Form 1096 by the last day of February.

Be sure to read the terms and conditions of the outsourcing service that you work with. Not all online outsourcing services provide this service. Some may even charge a fee for it.

Form 1096 summarizes your exemption from withholding employee taxes. The 1099-MISC form details the work you received from each provider. Outsourcing through vWorker (or any service just like it*) relieves you of having to send out 1099-MISC forms because the company processes them for you free. Note that you’re still required to file Form 1096 with the IRS.

Tax Write-Offs

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Solidifying what you might have heard on various forums, outsourcers can write off contractor payments. Tax write-offs can significantly reduce the amount of taxes owed to the federal IRS and your state, and independent contractor payments are considered a business expense. The SCHEDULE C (Profit or Loss From Business Form 1040) gives sole proprietors space to do it (Line 11).

You can additionally write off expenses related to outsourcing online: internet equipment, computer equipment, office furnishings, and more.