Hey everybody, it’s Matt from Interactive Accountants where we minimize your taxes and measure your success. Today we are talking about independent contractors. It’s January and it’s that time of year when we need to start issuing our 1099s.
So, if you have not already thought about it, make sure you’re reaching out to all your vendors that are independent contractors, getting a form W-9 from them, keeping that on file, and make sure you issue your 1099s by January 31st. And if you don’t already have one, make sure you get a copy of their workers’ compensation certificate, or if they don’t have workers’ compensation insurance, make sure you get a copy of their waiver so that you are not paying for their workers’ compensation with your hard earned dollars.
If you need help determining who is an Independent Contractor, we always advise our clients to look at the facts of Who, What, When, Where, What Why and How.
- Who: Is this a person your paying or their company?
- What: What exactly are you paying them for? Is it for goods or services?
- When: Do you tell them when to do it, or is there a fixed date in a contract it must be done by? Is it an open ended time frame?
- Where: Do you tell them where to do the work? Can they work from their office? Can they work remotely?
- Why: Is the work being performed in the ordinary course of business? Are you managing the work closely?
- How: Are they using certain equipment you own? Are they using special skills your company doesn’t have? Do they own technology that allows only them or a few others to do the work you need accomplished?
Most of these answers will give you an indication of whether the person is really an independent contractor or not. The IRS does provide a lot of guidance and the below can be found on their website IRS.GOV:
Help with Deciding
To better determine how to properly classify a worker, consider these three categories – Behavioral Control, Financial Control and Relationship of the Parties.
Behavioral Control: A worker is an employee when the business has the right to direct and control the work performed by the worker, even if that right is not exercised. Behavioral control categories are:
Type of instructions given, such as when and where to work, what tools to use or where to purchase supplies and services. Receiving the types of instructions in these examples may indicate a worker is an employee.
Degree of instruction, more detailed instructions may indicate that the worker is an employee. Less detailed instructions reflects less control, indicating that the worker is more likely an independent contractor.
Evaluation systems to measure the details of how the work is done points to an employee. Evaluation systems measuring just the end result point to either an independent contractor or an employee.
Training a worker on how to do the job -- or periodic or on-going training about procedures and methods -- is strong evidence that the worker is an employee. Independent contractors ordinarily use their own methods.
Financial Control: Does the business have a right to direct or control the financial and business aspects of the worker's job? Consider:
Significant investment in the equipment the worker uses in working for someone else.
Unreimbursed expenses, independent contractors are more likely to incur unreimbursed expenses than employees.
Opportunity for profit or loss is often an indicator of an independent contractor.
Services available to the market. Independent contractors are generally free to seek out business opportunities.
Method of payment. An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time even when supplemented by a commission. However, independent contractors are most often paid for the job by a flat fee.
Relationship: The type of relationship depends upon how the worker and business perceive their interaction with one another. This includes:
Written contracts which describe the relationship the parties intend to create. Although a contract stating the worker is an employee or an independent contractor is not sufficient to determine the worker’s status.
Benefits. Businesses providing employee-type benefits, such as insurance, a pension plan, vacation pay or sick pay have employees. Businesses generally do not grant these benefits to independent contractors.
The permanency of the relationship is important. An expectation that the relationship will continue indefinitely, rather than for a specific project or period, is generally seen as evidence that the intent was to create an employer-employee relationship.
Services provided which are a key activity of the business. The extent to which services performed by the worker are seen as a key aspect of the regular business of the company.
Consequences of Misclassifying an Employee
Classifying an employee as an independent contractor with no reasonable basis for doing so makes employers liable for employment taxes. Certain employers that can provide a reasonable basis for not treating a worker as an employee may have the opportunity to avoid paying employment taxes. See Publication 1976, Section 530, Employment Tax Relief Requirements for more information.
In addition, the Voluntary Classification Settlement Program (VCSP) offers certain eligible businesses the option to reclassify their workers as employees with partial relief from federal employment taxes.
The IRS can help employers determine the status of their workers by using Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. IRS Publication 15-A, Employer's Supplemental Tax Guide, is also an excellent resource.
Workers who believe an employer improperly classified them as independent contractors can use Form 8919 to figure and report the employee’s share of uncollected Social Security and Medicare taxes due on their compensation.
The IRS Small Business and Self-Employed Tax Center provides a multitude of resources for small businesses as well as self-employed independent contractors.