W2’s & 1099’s

It is crucial that business owners correctly determine whether the individuals providing services are employees or independent contractors. This is commonly referred to as misclassification of employees. 

Misclassification of workers is a significant issue to watch for as it may lead to substantial penalties and interest from government agencies. Generally, income taxes, social security taxes, and Medicare taxes must be withheld and paid on wages paid to an employee, while taxes do not need to be withheld or paid on payments made to independent contractors.

Determining Whether Individuals Providing Services Are Employees or 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:

1. Employee (common-law employee)
2. Government worker
3. Independent contractor
4. Statutory employee
5. Statutory nonemployee

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.

COMMON LAW RULES

Facts that provide evidence of the degree of control and independence fall into three categories:

 

1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does their job?

2. Financial: Are the business aspects of the worker’s job controlled by the payer? These include things such as how the worker is paid, whether expenses are reimbursed, and who provides tools and supplies.

3. 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 consider all of these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no set number of factors that determine if the worker is an employee or an independent contractor, and no one factor alone can make this determination. Additionally, factors that are relevant in one situation may not be relevant in another. The important thing is to consider the entire relationship and the extent of the right to direct and control the worker. Finally, document all factors used in your determination.

Consequences of Treating an Employee as an Independent Contractor

If you classify an employee as an independent contractor without a reasonable basis, you may be responsible for their employment taxes. This mistake can be costly. While it may be tempting to save some money, doing so could result in large liabilities during a federal or state agency audit. Industries such as construction, factories, restaurants, and office work are particularly vulnerable to such audits.

If you choose to classify your workers as independent contractors, you must complete a W-9 form and request additional documents, such as a business license and corporation documents. These documents can help you in the event of an audit. Additionally, you should avoid offering your contractors company benefits or use of company tools or equipment. Finally, be sure to issue a Form 1099-NEC at the end of the year if you have paid them more than $600 during the year.

PENALTIES

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.

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LAST UPDATED MAY 15, 2024 9:14 AM-c

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