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1099 Employee Paperwork
Q: I have hired a new 1099 employee and I don’t know what paperwork I need to complete at the end of the year? Do I prepare a W-2 or a 1099? Help?
A: Congratulations on creating a new position! Don’t forget that over 70% of all new jobs created in the United States come from small business owners just like you, so keep up the good work. Let me start with a few definitions related to your new worker to whom you referred to as a new “1099 employee.” This is a very common phrase and confirms the confusion related to worker classification since an employee would receive a W-2 at the end of the year, while an independent contractor would receive a 1099. From a definition standpoint, the term “1099 employee” is similar to an orange apple, meaning the two words just should not be used together.
Your new worker is either an employee or an independent contractor. An employee is anyone who performs services for your business that you control as to what will be done and how it will be done. An independent contractor is anyone who performs services for your business that you only control the end result of the work or the goal of the work, but do not control what or how the work will be done.
The key for determining the correct classification for each new worker is who controls the actual work product. The Internal Revenue Service looks at three different levels of control, behavioral control, financial control, and relationship control. IRS Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, is designed to asked questions related to these three areas of control to assist in determining the correct worker status. You can actually complete the form and mail to the IRS and they will make a determination for you. I recommend that you download the form from the IRS website and go through the questions with your new worker in mind. Even if you choose to send the form to the IRS, you should get a good feel of whether or not you control the work product in each section of the form.
If you determine that you indeed control the work product then your new worker should be classified as an employee. If so, you will be required to withhold applicable federal income tax, as well as FICA and Medicare tax and remit those taxes to the IRS on a monthly basis. You will also be required to file quarterly or annual payroll tax returns and at the end of the year complete a W-2 for your new employee.
If you determine that your new worker controls the work product and you as the company only control the end result of that work, then your new worker should be classified as an independent contractor. If so, the payments you make to the new worker will be summarized and reported at the end of the year on IRS Form 1099. The reporting requirement only applies if you pay at least $600 for the calendar year to the independent contractor.
Perhaps the most important point here is that the classification of your new worker is not a matter of choice. Avoid selecting the classification based on the perception of which one might be easier to deal with. Do your homework and make sure the classification is supported by your specific facts and circumstances.
As always, don’t forget that you are not alone. Bookmark our website at NASE.org as well as the IRS website at IRS.gov you will always be able to find the help you need.