The Internal Revenue Service (IRS) released issue IR-2021-186, reminding business owners to be judicious when determining whether individuals providing services are employees or independent contractors.
Employees are generally considered to be people who perform services for their organization if the business controls and has the right to control what will be done as well as how and when it will be done.
On the other hand, independent contractors are generally people working in an independent trade, business, or profession in which they offer their services to the public. Examples would be doctors, dentists, veterinarians, lawyers, accountants, contractors, subcontractors, public stenographers, or auctioneers are generally classified as independent contractors.
Income for independent contractors is reported on Form 1099-NEC, while income for employees is reported on Form W-2. The IRS offers guidance in the following chart to help determine the appropriate employment status.
Independent contractor vs. employee Whether a worker is an independent contractor, or an employee depends on the relationship between the worker and the business. Generally, there are three categories to examine:
Behavioral Control − does the company control or have the right to control what the worker does and how the worker does the job?
Financial Control − does the business direct or control the financial and business aspects of the worker’s job? Are the business aspects of the worker’s job controlled by the payer? (Things like how the worker is paid if expenses are reimbursed, who provides tools/supplies, etc.)
Relationship of the Parties − are there written contracts or employee type benefits (i.e., pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
The IRS warns that misclassifying workers as independent contractors adversely affects employees because the employer’s share of taxes is not paid, and the employee’s share is not withheld. When a business misclassifies an employee without a reasonable basis, it could potentially be held liable for employment taxes for that worker. Generally, an employer must withhold and pay income taxes, Social Security and Medicare taxes, as well as unemployment taxes. Workers who believe they have been improperly classified as independent contractors have recourse. They can use IRS Form 8919, Uncollected Social Security and Medicare Tax on Wages (.pdf) to figure and report their share of uncollected Social Security and Medicare taxes that could potentially be due on their compensation.
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For the Form 1099, which is required for reporting Nonemployee Compensation Income (formerly Box 7 of Form 1099-MISC), the Internal Revenue Service requires companies to e-file if issuing 250 or more 1099 forms by January 31st, making outsourcing a must for most organizations. Form 1099-NEC is not part of the Combined Federal/State Filing Program (“CF/SF”), meaning that individual state filings are also required for some states. The SPS/GZ 1099 processing solution allows for easy form creation, 1099 e-filing, and seamless form amendments without the need to buy and manage software. SPS/GZ also provides filing-only services with the IRS or individual states for any form type. SPS/GZ prides itself on providing top-notch services with a pricing structure that is flexible and reasonable.
SPS/GZ continues to stay abreast of new IRS and state requirements from year to year. In addition to 1099 forms, SPS/GZ creates and e-files Affordable Care Act tax forms, Forms 3921 and 3922, and Form 1042-S. Reach out today at firstname.lastname@example.org or call at (888)375-3049.