First of all, HAPPY BIRTHDAY EMMA! You are an absolute joy and source of so much happiness in my life. Love you. Next, we jump into our Technical Tuesday topic of the week, and this week it is 1099s. QuickBooks Online gives you the ability to track, send, and file 1099 forms for your independent contractors so you can be prepared with it’s time to file with the IRS and stay compliant.
Sometimes the line between an independent contractor and an employee is fuzzy. It’s important to know the difference in order to comply with IRS tax rules. 1099 workers are also known as self-employed workers or independent contractors. These workers receive a 1099 form to report their income on their tax returns. W-2 workers are also known as employees. Your company employs these workers directly, and they receive regular pay and employee benefits. You’ll use a W-2 tax form to report annual compensation and payroll taxes withheld from their compensation. Every small business owner should understand the differences between these classifications and when to hire a W-2 versus 1099 worker. But the differences aren’t always clear.
There is no magic formula to determine whether a worker is an independent contractor or an employee. But the IRS does offer some guidance. Three categories determine the degree of control you have over a worker.
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does their job?
- Financial: Does the company or payer control the business aspects, like how it pays the worker? Are the worker’s expenses reimbursed? Who provides the tools and supplies needed to get the job done?
- Type of relationship: Do you have employee policies or offer employee-type benefits like pension, insurance, and vacation pay? Is the work performed a key aspect of the business? Will the relationship continue once the work is done?
Some of your answers to the above questions may indicate the worker is an employee. Others may indicate the worker is a 1099 contractor. It’s up to you to consider all the factors, determine the extent of control over the worker, and thoroughly document your final decision.
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