Why do most people want to run contract labor through payroll? The #1 reason is direct deposit. Many companies are using the ACH direct deposit feature of the Payroll system to deposit employee checks and have found it so user-friendly and easy that they want to do the same for their “regular” contract labor people. Another reason might be to deduct and pay their Child Support.  

In PakEnergy, it is simple to run contract labor through the same cycle as regular employees AND report each on its different government form (employees get W-2s, while contract labor gets 1099s).

A word of warning!! The IRS has strict rules on who is an employee vs. who is contract labor. As a general rule, IF you have an employee that worked for you, they will NEVER also be contract labor!!  Therefore, do not EVER set up a contract labor worker with any taxable detail codes (like salary or hourly details).  A contract labor person is NOT subject to Federal, FICA, or any other deduction taxes and requires special treatment! They will have one and only one detail, and that is called Contract Labor.

Set up the company detail called Contract Labor. This detail will not be subject to any taxes of any kind. It is IMPERATIVE that all switches are UNCHECKED.

Set up detail code at the employee level. When setting up the contract labor worker, they will have ONLY 1 detail called Contract Labor. You will set up all their other normal information (such as name/address/tax ID) like every other employee.

The payroll cycle will be processed as normal, just like any other cycle, and can be processed with other normal taxable employees.

When it is time to extract W-2s at year-end, you will need to code the new Contract Labor detail into whichever 1099 box is applicable (Box 1 or Box 7) on the Extract W-2 utility.

The 1099 amount will automatically be extracted into the 1099 system, ready for printing and filing with the IRS.