Trying to understand the difference between employees and independent contractors and when to use 1099s and W-2S can be extremely overwhelming and confusing. Even if you have payroll support it is still essential to have a basic understanding of how to classify workers, since this affects how you and they are taxed. Below you will find a 1099 checklist for you to reference.
When a person is paid on the Form W-2, the employer automatically withholds and pays all necessary employee income taxes required by the IRS. When a person is paid on the form 1099-misc, all money earned by the individual is paid on an untaxed basis. It is the responsibility of the individual to file and pay the appropriate taxes.
IRS 20-Point 1099 Checklist
How to determine if a contractor should be paid on a W-2 or 1099?
The IRS has established a 20-point 1099 checklist that can be used as a guideline in determining whether an individual is an employee or an independent contractor. Employees should be paid using a W-2 and an independent contractor is paid using a 1099 form.
Following are the 20-points that have been established.
- Instructions. An employee must take instructions about when, where, and how to work from management staff.
- Training. An employee may be trained to perform services in a particular manner. Independent contractors typically use their own methods and therefore receive no training from the service purchaser.
- Integration. An employee performs services that are integrated into the business operations because the business is dependent on the service provided by that individual.
- Services rendered personally. An employee personally performs services.
- Hiring assistants. An employee works for an employer who hires, supervises, and pays workers. An independent contractor can hire, supervise, and pay assistants.
- Continuing relationship. An employee typically has a continuing relationship with an employer.
- Set hours of work. An independent contractor can set their own hours, while an employee usually has set hours of work established by an employer.
- Full-time required. An employee may be required to work full time, while an independent contractor can generally set their own hours.
- Work done on premises. An employee will usually work on the premise of an employer, or a location that has been designated by the employer.
- Order or sequence set. An employee may be required to work in the order set by an employer.
- Reports. An employee may need to turn in reports to an employer, which implies a degree of control.
- Payments. An independent contractor is typically paid by the job or commission, while an employee is usually paid by the hour, week, or month.
- Expenses. An individual who is reimbursed for business and travel expenses is generally an employee.
- Tools and materials. An independent contractor must typically supply themselves with necessary tools and materials, while an employee is provided them by the employer.
- Investment. An independent contractor has an investment in the facilities used to perform services.
- Profit or loss. An employee is free from suffering a loss or realizing a profit from their work.
- Works for more than one person/firm. An employee only provides services to your company, while an independent contractor generally can provide services to two or more firms at a time.
- Offer services to the general public. Independent contractors make their services available to the general public.
- Right to fire. An employer can fire an employee, while an independent contractor cannot be fired as long as they produce a result that meets to requirements of the contract.
- Right to quit. An employee can quit their job without incurring liability, but an independent contractor is responsible for the completion of a contract and can be legally obligated to make good for failure to complete it.
This list can be quite overwhelming. If you are still unsure what form to use, contact our HR Director, Sarah Kramer to learn more.
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