SUBJECT: Independent Contractors' Responsibility for Income Tax Reporting and Withholding

REFERENCES: IC 6-3-4-2; IC 6-3-7-5; IC 6-8.1-3-21.2; IC 22-3-2-14; IC 22-3-2-14.5; IC 22-3-6-1

DISCLAIMER: Information bulletins are intended to provide nontechnical assistance to the general public. Every attempt is made to provide information that is consistent with the appropriate statutes, rules, and court decisions. Any information that is not consistent with the law, regulations, or court decisions is not binding on either the department or the taxpayer. Therefore, the information provided herein should serve only as a foundation for further investigation and study of the current law and procedures related to the subject matter covered herein.

SUMMARY OF CHANGES

Aside from nonsubstantive, technical changes, this bulletin has been changed to fix links and remove outdated references.

INTRODUCTION

The purpose of this bulletin is to summarize the reporting and withholding requirements for independent contractors. The bulletin also explains the application procedure for an exemption certificate to be issued to independent contractors that elect not to be covered by worker's compensation insurance.

RESPONSIBILITY OF INDEPENDENT CONTRACTORS FOR PAYING ESTIMATED TAX AND WITHHOLDING INCOME TAX

Independent contractors (except for race team members as defined under IC 6-3-2-3.2) generally do not have Indiana income tax withheld by the parties that they contract with for services. Because of this, the independent contractor is required to file quarterly estimated income tax payments with the department. The simple guideline is that if there is no federal withholding and the independent contractor is required to make federal estimated payments, then Indiana requires the independent contractor to make Indiana estimated payments if their annual Indiana state and local income tax liability exceeds $1,000.

If the independent contractor hires employees, the independent contractor is an employer and is required to withhold Indiana adjusted gross income tax and local income taxes from the employees' wages and remit them to the department in the same manner as any other employer.

DEFINITION OF INDEPENDENT CONTRACTOR

Because of the link to the Internal Revenue Code that Indiana has adopted, those same definitions apply at the state level.

APPLICATION FOR CERTIFICATE OF EXEMPTION WITH THE DEPARTMENT OF REVENUE

An independent contractor is required to file with the department a statement and documentation of the independent contractor's status. The independent contractor must pay a $5.00 filing fee (nonrefundable) and obtain a clearance from the department before a certificate of exemption is issued. The certificate is valid for one year. The certificate of exemption is required to be filed with the Worker's Compensation Board, and a filing fee of $15.00 must be paid for the certificate to be effective. The total $20.00 fee is to be paid to the department at the time the independent contractor files an application for the workers' compensation exemption certificate. The application (Form WCE-1) is available at in.gov/dor/business-tax/contractors-doing-business-in-indiana/workers-compensation-exemption-certificate-clearance/.

The certificate of exemption must be renewed annually with the department. The certificate of exemption must certify that the independent contractor has workers' compensation coverage for its employees in accordance with IC 22-3-2 through IC 22-3-7 and that the independent contractor desires to be exempt from being able to recover under the workers' compensation policy or self-insurance of a person for whom the independent contractor will perform work.

The department will cooperate with the Department of Labor, the Workers' Compensation Board, and the Department of Workforce Development concerning improper classification by a contractor of an individual as an independent contractor.

For further information, contact the Payment Services Division of the Indiana Department of Revenue at (317) 232-5977.

_________________________

Robert J. Grennes, Jr.

Commissioner