The following question recently came from one of our clients requesting our assistance to better understand and manage this issue.
Question: My boss would like to pay an independent contractor a “bonus”. I am concerned about using the term “bonus” within the IRS definitions of the independent contractor classification. Is there any way we can provide specific recognition for a job well done and maintain compliance with the IRS classification?
Answer: Depending upon how the additional payment is structured, it could be classified as a payment for exceeding the terms of the contract and could be done without triggering undue compliance concerns. You are correct, however, in being careful not to treat independent contractors like employees, especially as it relates to the form and method of pay or benefits (the two components subject to taxation and of most interest to the IRS).
The key is to ensure that the workers you have classified as independent contractors are truly independent. The IRS has good definitions and other tools to help businesses make those determinations that can be found at: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Independent-Contractor-Self-Employed-or-Employee
Therefore, while this answer does not constitute legal advice, we cannot find any prohibition in the statutes that disallows paying an independent contractor that meets the IRS criteria for independence an additional contract or service fee for work or performance excellence. Make sure that the payment is not structured or considered a bonus for which employees would also be eligible. In addition, report all contracted amounts paid (plus the additional payment) via IRS Form 1099; it is up to the contractor to file and pay taxes on all earnings.