| Can I 1099 my technicians? An employee or not
an employee? That's an issue now under close scrutiny by the Internal Revenue Service. Determined
to capture some of the estimated $4.7 billion in uncollected taxes resulting from worker
"mis-classifications" IRS has created a "Employment Tax Examination
Program". The target: small business with revenues of $3 million or less.
Last year alone, 92 percent of the 9,000 audited employers were ruled to have
mis-classified workers as independent contractors. The average bill: $15,000.00. The IRS
strategy involves matching the Form 1099-MISC information returns filed by employers with
independent contractors tax returns. If a tax return shows that an "independent"
actually received the bulk of his or her income from one source, the IRS is tipped off to
investigate what in fact may be an employer/employee relationship.
Despite the IRS crackdown, business should not be dissuaded from making use of
legitimate independent contractor or freelance workers. However, business must exercise
commonsense when making decisions on employee/non-employee status.
The following guidelines should be followed when considering the use of an outside
contractor.
- Contract only with established outside suppliers who invoice for services rendered.
- Document worker relationships with a written independent contractor agreement.
- Always file Federal Tax Forms 1099 MISC to report payments to independent contractors.
This is mandatory if payments to the contractor during a calendar year exceed $600.00.
- Obtain and familiarize yourself with IRS Regulation 31.3121 (d)-1, IRS manual Exhibit
4640-1 and IRS form SS-8.
Remember that when
you hire an independent contractor, you should ask for and receive
his or her own business card, as well as any statement for services
rendered, showing the business name, separate phone or fax number
and logo, if any, even a copy of an advertisement they placed in the
local phone book--anything that evidences their independent status.
In addition, keep available all Letters of Agreement, contracts or
receipts tending to show or back-up the independent contractor
relationship. The worker designated as an independent contractor
should meet the IRS criteria, a set of twenty questions the IRS uses
to make their determination of employment classification.
Keep in mind the loose checklist that
follows is the best means of understanding how the IRS determines
employee vs. independent contractor status. However, the checklist
is intended as a guideline. The IRS will consider each occupation
and the context of the situation. So, use these twenty questions to
help you decide who is and who isn't an independent contractor.
A
Serious Game of 20 Questions
Here are the 20 questions the IRS will use to determine if workers are company
employees or true independent contractors. The IRS considers any "yes" answer to
be evidence of an employer/employee relationship.
1. Do you provide the worker with instructions as to when, where and how work is
performed?
2. Did you train the worker in order to have the job performed correctly?
3. Is the person prevented from delegating work to others?
4. Are the workers services a vital part of your company's operation?
5. Is the worker prohibited from hiring, supervising, and paying assistants?
6. Does the worker perform services for you on a regular and continuous basis?
7. Do you set the hours of service for the worker?
8. Does the worker work full time for your company?
9. Does the worker perform duties on your company's premises?
10. Do you control the order and sequence of the work performed?
11. Do you require workers to submit oral or written reports?
12. Do you pay the worker by the hour, week or month?
13. Do you pay the workers business and travel expenses?
14. Do you furnish tools or equipment for the worker?
15. Does the worker lack a "significant investment" in tools, equipment, and
facilities?
16. Is the worker insulated from suffering a loss as a result of the activities at your
company?
17. Does the worker perform services solely for your firm?
18. Does the worker not make services available to the general public?
19. Do you have the right to discharge the worker at will?
20. Can the worker end the relationship without incurring any liability?
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