IRS Checklist for 1099 Consultants vs W2 Employees
Lately, there has been increased scrutiny by IRS (as well as states) for employers not showing proper payroll, especially the ones showing W2 employees as 1099 consultants to avoid payroll taxes. Please note that the onus to pay proper payroll taxes (even for the employees) remains on the employer, and there are hefty penalties for employers not paying the proper payroll taxes. Here are the 10 main factors that are typically used by the IRS and the states to determine whether an individual is an employee (W-2) or an independent contractor (1099).
- Does the individual receive training from your company: Training a worker or requiring the worker to attend meetings indicates that the worker is likely an employee.
- Must the individual personally perform the contracted services: If the services must be rendered by that person (only), it indicates more of an employer-employee relationship as opposed to a contractual relationship;
- Must the individual work set hours: The establishment of set hours of work is a factor indicating that the worker is likely an employee;
- Is the work performed on company premises: If the work is performed on the premises that factor suggests control over the worker, especially if the work could be done elsewhere.
- Must the individual give you reports regarding his/her work: A requirement that the worker submits regular or written reports to the person or persons for whom the services are performed indicates a degree of control over the worker and tends to show the existence of an employer-employee relationship.
- Is the individual paid by the hour, week, or month: Payment by the hour, week, or month generally points to an employer-employee relationship; on the other hand, payment made by the job or on a straight commission generally indicates that the worker is an independent contractor.
- Do you supply the individual with needed tools or materials: The fact that the employer furnishes significant tools tends to show the existence of an employer-employee relationship.
- Is the worker free from suffering a loss or realizing a profit based on his/her work: A worker who can realize a profit or suffer a loss as a result of the worker’s services is generally an independent contractor
- Does the individual only perform services for your company: If a worker performs services for a multiple of unrelated persons or firms at the same time, that factor generally indicates that the worker is an independent contractor.
- May the individual terminate his services at any time: If the worker has the right to end his or her relationship with the employer at any time he or she wishes without incurring liability, that factor indicates an employer-employee relationship.
I would like to emphasize that everyone’s situation is different so it’s important to fully consider your specific situation before deciding. The list does not guarantee that a person is correctly classified, and most agencies and tax courts typically look at the totality of the circumstances to determine whether a worker is an employee, but the list is very helpful in determining if the new hire qualifies as a 1099 contractor.
1099-NEC vs 1099-Misc (Who must file)
Starting this year, 1099-NEC is used to report independent contractor payments as opposed to 1099-Misc that we had until last year. Form 1099-MISC is still around and it’s used to report miscellaneous income such as rent or payments to an attorney.
The due date for the 1099-NEC is February 1st and the due date for 1099-MISC is March 1st this year.
The rule is that you must file a form 1099-NEC whenever you pay an individual or an independent contractor (sole proprietor, a partnership, or LLC) more than $600 in a year (in total) for the work done in the course of your trade or business. Please do NOT file 1099-NEC for employees. All employee compensation (including wages, tips, bonus, commission, etc) must be reported on form W2. There are significant penalties for misclassifying employees as contractors.
Please note that a trade or business is an activity carried on for gain or profit i.e. you don’t have to file a 1099-MISC for payments for non-business related services (or household service) for example babysitters, gardeners, and housekeepers.
Along with sending a copy to the contractor, a copy of the 1099 form must also be filed with the federal govt. and the state govt. For more information on 1099 filing, please check the link at the IRS website: