In my last blog I discussed some year-end planning tips to get ready for W-2 and 1099 processing. Today, I thought I would continue with my year-end planning kick and talk more about classification of who performs service on your behalf to produce W-2’s and 1099’s correctly. The first step is determining, “are they an employee or an independent contractor?”
It is extremely important for business owners to correctly determine who is an employee and who is an independent contractor for their business. Generally, for employees you withhold income taxes from their paycheck and withhold and pay Social Security/Medicare taxes on their behalf to the appropriate agencies, whereas with an independent contractor you do not. An independent contractor is considered self-employed and receives gross compensation from your business for the services they provide. The independent contractor files taxes and then pays self-employment tax which includes Social Security and Medicare directly to the appropriate agency as well as income taxes. An independent contractor is someone who is in business for themselves or a contractor who provides services to other businesses, usually providing service for more than one business at a time. For an employee, you collect a W-4 to determine how much tax to deduct from their paycheck and issue them a W-2 after year-end. For an independent contractor, you collect a W-9 and issue a 1099 after year-end.
The key to determining if someone’s relationship with your company is that of an employee or an independent contractor is by looking at the relationship as a whole; through the behavior, the financial aspects, and the type of relationship. If you, as the business owner, have behavioral control over the worker, then you have the control to direct when and how the worker does the work. In these cases, they are classified as an employee. For instance, with an employee, you can direct the hours of work, Monday- Friday 9am-5pm, whereas an independent contractor generally has more freedom to work under their own terms. Financially, an employee is paid a salary or hourly wage compensation based on the hours they are performing work; whereas an independent contractor may be paid a flat fee for a job. The type of relationship between a worker and the business can also assist in determining if they are an employee or a contractor. If the worker is hired for a specific amount of time or for a project, they are considered an independent contractor, where as if the worker is hired for an indefinite amount of time, the worker should be considered an employee. All of the above factors need to be taken into consideration as a whole in making the determination of an employee or an independent contractor.
If you are still unsure whether the worker is an employee or an independent contractor after reviewing the relationship as a whole through the behavior, financial implications, and type of relationship, then you can fill out Form SS-8 “Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholdings” and submit it to the IRS for the determination. This form can take at least 6 months to process and get a determination back, so you really need to think in advance about this since you probably need the work done now or in the near term.
Remember, you need to issue 1099’s to any independent contractors you paid over $600 in the calendar year by January 31st. W-2’s need to be sent out to all employees who worked for you in the previous year by January 31st regardless of whether they are currently employed at year-end or not. See my other blog, “Year End Planning – W2’s and 1099’s” for tips on how to prepare for year-end for employees and independent contractors. TGG Accounting assists most of our clients with year-end processing items like 1099s. Call us today.Written by: Bridgette Cerles TGG Accounting