As we close out 2024, it makes sense to review some foundational information regarding vendors, contractors, and employees.  Everyone knows what an employee is but some may have difficulty explaining the difference between contractors and vendors.  It’s important to use the right terminology and to have a clear understanding of what they do, how they get paid, and the potential tax implications for your business.

🔹 Vendor: A business or individual that sells goods or services. Vendors provide products like supplies, tools, or software to support your operations.

Payment: Typically paid via invoice for goods or services delivered. The vendor sends an invoice, but to your company, it’s a bill and must be properly expensed.
Tax Implications: No tax withholdings.

🔹 Contractor: A person or business hired to complete specific tasks or projects. Contractors offer expertise, like marketing, design, or IT support, usually working for a set period or under an agreement and without direct supervision of the client.

Payment: Paid upon invoice or milestone completion, based on agreed terms.
Tax Implications: No tax withholdings; you issue a 1099-NEC if you paid $600+ in a year. Contractors handle their own taxes.

Key Points Regarding Contractors:

• Obtain a W-9: Before paying a contractor, request a W-9 form to collect their tax ID number.
• Set Clear Terms: Define payment terms in the contract, including due dates, milestones, and acceptable payment methods.
• Pay Promptly: Adhere to agreed payment timelines to maintain a professional relationship.
• Track Payments: Keep detailed records of all payments made to contractors for accurate reporting.
• Issue a 1099-NEC: If you pay $600 or more in a calendar year, file and provide a 1099-NEC by January 31.

🔹 Employee: Someone hired directly by your business, often working under your supervision, with set hours and ongoing responsibilities. Employees receive benefits like payroll taxes, insurance, and paid time off.
Payment: Paid a regular salary or hourly wage through payroll.
Tax Implications: Employers withhold income taxes, Social Security, and Medicare, and also contribute to unemployment insurance and other payroll taxes.

Key Differences:

• Vendors supply what you need.
• Contractors execute what you need to get done.
• Employees are part of your team and contribute to long-term success.

Takeaway: Understanding these roles—and their payment and tax requirements—keeps your business compliant and running smoothly!