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Planning to reward your independent contractors with a bonus? Find out what the independent contractor bonus clause is and how you can legally give an incentive.
What is a bonus for independent contractors?
In a nutshell, a bonus is something that you give to workers as encouragement for doing good work. The most common kind of bonus is a payment incentive (but there are many others).
Independent contractors are not full-time employees, so they do not receive usual employee benefits. Offering an additional monetary payment to recognize their work can be a good idea—especially if you would like them to remain on your payroll for the long run.
Types of bonuses for independent contractors
There are a number of types of bonuses for independent contractors; some examples include:
- A bonus for completing a project early
- A bonus for achieving certain project-based goals
- A bonus for exceeding the goals
- A bonus for accepting additional projects, or renewing the contractual agreement
Look out for misclassification risks
Independent contractor vs. employee
It’s important to understand the legal differences between independent contractors and employees so that you don’t inadvertently face misclassification penalties.
When you give your independent contractor a bonus, make sure the person doesn’t resemble a full-time employee. The IRS is quite strict when it comes to meeting the criteria of a full-time employee, so you don’t want to do anything that will put you at risk.
Keep in mind that sometimes the word “bonus” may sound like something an employee would receive, so consider calling it a payment incentive instead. This will help distinguish your contractor bonus system from your employee system, which is important for compliance.
If you want to give an independent contractor a bonus while protecting your business from potential misclassification risks, we suggest adding a special bonus clause in your independent contractor agreement to clearly outline how it’ll work.
Include a bonus clause in the independent contractor agreement
An independent contractor agreement is a legal document that outlines the working relationship between a company and its contractors. This enables both parties involved to cover the bases of their work together, avoid misunderstandings, and manage expectations.
The contract agreement should also cover the scope of work, deliverables, payments, deadlines, confidential information, and any other contract terms.
If you decide to give a bonus to your contractors, include an independent contractor bonus clause within the agreement.
You should clearly state the criteria for bonuses, as well as their calculation, to help manage expectations and protect yourself from misclassification-related risks.
Keep in mind that the contractor’s compensation must be clearly separate from bonuses. For example, if an independent contractor agreement specifies that they will receive $10,000 at the end of the contract period, a company cannot pay them $6,000 for agreed work and $4,000 as a bonus. Bonuses are extra compensation paid on top of what is already in the contract.
Other considerations: laws and regulations
An Independent contractor agreement is typically legally binding, meaning that the offer or a promise of a bonus is binding as well. If the written contract explains the bonus criteria and said criteria are met, it is your legal obligation to fulfill it. In case you don’t exercise the agreement, a contractor can file a civil suit against you and the company.
If you are hiring contractor services abroad, it’s worth checking the local laws and regulations or seeking legal advice to ensure you are complying with them as well.
Tax considerations for US companies
Any US independent contractor who has been paid more than $600 within a tax year must receive a Form 1099-NEC at the end of the tax year. Any international contractor who has been paid more than $600 within a tax year must receive a Form W8-BEN.
This means that if you pay a bonus to an independent contractor, the tax form must reflect both the compensation and the bonus. If you fail to report this correctly, both you and the contractor may be at risk of tax penalties.