Late in 2011, the Internal Revenue Service Department established new rules and regulations for independent contractors during 2012. These Rules came to effect on January 1, 2012. It is critical that employers pay close attention to this information since it affects the business in major ways.
According to the Internal Revenue Service Department, below is a condensed list of vendors who are not supposed to be classified as a 1099 vendor:
- Payments to a Corporation (see IRS website for reportable payments)
- Payments for merchandise, telegrams, telephone, freight, storage, and similar items
- Payments of rent to real estate agents
- Wages paid to employees
- Military differential wage payments made to employees while they are on active duty in the armed forces or other uniformed services
- Business travel allowances paid to employees
- Cost of current life insurance protection
- Payments to a tax exempt organization including tax exempt trust (IRA’s, HASs. Archer MSAs and Coverdell ESAs)
More details on who is not required to receive 1099 are on Internal Revenue Service’s website.
The changes to what qualifies as a 1099 and what does not are minor compared to 2011. The major changes to the laws are the penalties. It is critical for the business owner to make sure that they are complying with the laws and not be liable for any penalties. Beginning next year, companies will be penalized $5,000 to $15,000 per violation for willfully misclassifying independent contractors. If a pattern of misconduct is identified, the business can incur civil penalties up to $25,000 per violation.
According to San Diego Source, the new statute also allows for a private action to be held against the business. Meaning a plaintiffs’ attorney can sue on behalf of a party of contract workers based on California Private Attorney General Act (PAGA). Since there is some money that can be made, plaintiffs’ attorneys will look for opportunities to leverage this change.
If accused of willfully misclassifying independent contractors, fines are not the only penalty the business will incur. The business will be required by law to post a notice on its website admitting wrongdoing and directing employees who believe they have been misclassified to contact the California Labor and workforce Development Agency (LWDA). The notice is required to be posted for at least a year.
For more details on classifying employees and 1099 laws, visit the Internal Revenue Service website.Written by: Adriat Markos TGG Accounting