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December 3, 2020

Q: Can you pay a freelancer or independent contractor a bonus?

Bonuses can be paid to independent contractors and freelancers.

Ask Liquid: Can you pay a freelancer a bonus?

Compliance Ask Liquid Finance and Accounting Freelancer Management

Independent contractors and freelancers, also referred to as 1099 workers, work for your company on a contractual basis. The amounts paid to these workers is specified in a work order, which defines the associated work and fees. Work orders are usually tied to a Master Services Agreement. You can give a bonus to the freelancer, as long as you are following the contract terms and applicable employment laws.

Offering a Bonus to Independent Contractors

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The bonus must be additional compensation beyond the pay specified in the worker’s contractual agreement for the completion of the contracted work. The bonus should not be based on any terms or requirements that would conflict with the worker’s classification.

We recommend including any bonus offers and incentives within your contractual terms. You should specify the performance triggers that would trigger the bonus, as well as any variance. For example, early completion of a critical project could result in a bonus payment – an extra 5% for delivering one week early and an extra 10% for delivering two weeks before the deadline. 

Tax Implications of Freelancer Bonuses

You do not need to pay payroll taxes on payments to freelancers and independent contracts. However, You must report any payments (in a given tax year) to an independent contractor or freelancer that total $600 or more. As of the 2020 tax year, report these payments using Form 1099-NEC. (Before the 2020 tax year, these payments were reported via the Form 1099-MISC.) 

The payments reported must be all inclusive and include any bonuses. For example, if you paid a freelancer $500 as specified in your work order as well as a $100 bonus, then you would need to file a 1099-NEC by February 1st of the following year. 

Paying Freelancer Bonuses in Liquid

There are two ways to pay a freelancer a bonus in Liquid.

The first option is to set up the bonus payment before work is agreed to. Navigate to the Work Orders section and create a new Work Order for the bonus payment. Clearly define the terms under which the bonus payment would be made. Depending on the terms of the bonus payment, you will likely want to select after we have confirmed receipt of the deliverable or on the specific date of as the terms for invoice date. Then, after the pre-agreed terms of the bonus have been met, your Vendor can invoice you for the bonus.

The second option is to set up the bonus payment after work has been completed without creating a new Work Order. Navigate to the Invoices section and press +Invoices to upload an Invoice created outside of Liquid that describes the terms of the bonus payment. Then, you will be able to immediately pay the invoice. 

Ready to pay your freelancers in 175+ countries worldwide? Try Liquid today

Category: Compliance Ask Liquid Finance and Accounting Freelancer Management

Updated: December 3, 2020

Quick note: This is not to be taken as tax advice or legal advice or payroll advice. Since tax rules and laws change over time and can vary by location and industry, consult a CPA / tax advisor and/or attorney for specific guidance.

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