It is critical that business owners correctly determine whether the individuals providing services are employees or independent contractors. This is normally called misclassification of the employee. Misclassification of workers is an important issue to watch for. There might be a big penalty and interest from government agencies. Generally, you must withhold income taxes, social security taxes, and Medicare taxes and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors.
Before you can determine how to treat payments you make for services, you must first know the business relationship that exists between you and the person performing the services. The person performing the services may be one of the following:
employee (common-law employee)
In determining whether the person providing the service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered.
Facts that provide evidence of the degree of control and independence fall into three categories:
Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
Financial: Are the business aspects of the worker’s job controlled by the payer? These include things like how worker is paid, whether expenses are reimbursed, who provides tools and supplies.
Type of Relationship: Are there written contracts or employee-type benefits (i.e., pension plan, insurance, and vacation pay)? Will the relationship continue, and is the work performed a key aspect of the business?
Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, whereas other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors that are relevant in one situation may not be relevant in another. The keys are to view the entire relationship and consider the extent of the right to direct and control the worker. Finally, document each of the factors used in your determination.
If you classify an employee as an independent contractor and you have no reasonable basis for doing so, then you may be held liable for employment taxes for that worker. This is an expensive mistake. I understand we would like to save money here and there, but doing this might lead to facing a bid liability in a federal or state agency audit. Construction, factories, restaurants, office employees are the most in danger of the audit by the agencies. In case you decided to classify each individual as an independent contractor and pay them under the 1099 basis, you need to look at the following;
Complete a W-9 form
Request the following documents.• Business license • Business fictitious name statement • Corporation documents if the business is incorporated • Website material • Documents that support this status.
These documents will help you in case of an audit. Never offer them to use a company telephone, tools, or any company benefits. At the year-end, make sure to issue them a Form 1099-NEC if you paid them over $600.00 per year.
The civil penalties for misclassification of an employee are between $5,000.00 and $25,000.00 plus all applicable tax liability.
WHAT WE DO:
We are able to prepare all different variants of Form1099, including the NEC, MISC, Rent, interest, medical and health payments and more.