Payments to Independent Contractors can be a very grey area within the tax law. Often times I am asked the question, “Should my employees be given a W-2 or Form 1099-MISC for there pay?” There’s really no clear-cut answer to this question. It’s important to answer other questions to even begin to get some clear direction on the proper way to classify a worker as an employee or an independent contractor.

There are two types of business relationships which may exist between an employer/owner and a employee/worker. They are 1. Independent contractor and 2. Employee (common-law employee).

These business relationships are established based on common-law rules:

1. Behavioral

2. Financial

3. Type of Relationship

For clarification of a worker’s status, Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding should be completed and submitted to the IRS

Helpful forms and publications for independent contractors include Form 1099-MISC and Publication 15 – Circulation E, Employer’s Tax Guide.

Form 1099-MISC is used to report payments to certain types of vendors for certain types of services:

• Payment to someone who is not your employee;
• Payment for services in the course of your trade or business;
• Payment to an individual, partnership, estate, or in some cases, a corporation; and
• Payments to the payee of at least $600 during the year.

Information reported on Form 1099 is as follows:

• The payor’s name and address.
• The payor’s federal identification number.
• The recipient’s identification number.
• The recipient’s name and address, and
• Box 7 – the amount paid to the independent contractor for the year.

Penalties for failing to properly file the correct forms can be very significant.

If you need additional help handling your 1099-MISC and job classification issues feel free to connect with me on TaxConnections.

Original Post By:  Darren Sanford