It’s important to know before you hire new staff whether the person will be working as an independent contractor or an employee. It’s helpful to have an independent contractor agreement that clearly outlines the business relationship to avoid any misunderstanding about the classification. Business owners when hiring employees have employee handbooks available that highlights policies and procedures related to their employment, workplace safety, expectations, benefits, time-off/leave, and compensation.
An Independent contractor is an individual that provides services to a business or individual. You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). Independent contractors are subject to Self-employment taxes.
The IRS provides the following list of facts to determine the degree of control:
- Behavioral: Does the employer 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 employer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
- Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
W-9 and F1099-MISC
If you determine that your staff is an independent contractor, then you should obtain Form W-9 Request for Taxpayer Identification by January 31st of the following year you’ll need to issue Form 1099- MSC to report payments made in the course of a trade or business to others for services rendered.
If you paid someone who is not your employee, such as a subcontractor, attorney or accountant $600 or more for services provided during the year, a Form 1099-MISC (PDF) needs to be completed, and a copy of 1099-MISC (PDF) must be provided to the independent contractor by January 31 of the year following payment. Starting with 2016, you must also send a copy of this form to the IRS by January 31.
Exception to F1099-MISC
There are certain situations where a 1099 is not required. These exceptions are listed in the 1099 Instructions. https://www.irs.gov/pub/irs-pdf/i1099msc.pdf
One notable exception I’ll highlight here is:
“Form 1099-K. Payments made with a credit card or payment card and certain other types of payments, including third-party network transactions, must be reported on Form 1099-K by the payment settlement entity under section 6050W and are not subject to reporting on Form 1099-MISC. See the separate Instructions for Form 1099-K.”
An Employee is anyone who performs services for you and you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed. As the employer you are responsible for withholding, reporting and depositing employment taxes such as such as, federal income tax, social security and Medicare taxes and Federal Unemployment (FUTA) Tax.
Employers must deposit federal income tax withheld and both the employer and employee social security and Medicare taxes. You also must report on the taxes you deposit, as well as report wages, tips and other compensation paid to an employee. You can E-file Forms 940, 941, 943, 944 or 945 for Small Businesses.
Consequences of Treating an Employee as an Independent Contractor
If you classify an employee as an independent contractor and you have no reasonable basis for doing so, you may be held liable for employment taxes for that worker.