Independent Contractors - How to Classify Workers
To determine whether a worker is an independent contractor or an employee, IRS examines the relationship between the worker and the business, and considers all evidence of control and independence. The facts that provide this evidence fall into the following three categories:
(1) Behavioral control covers facts that show whether the business has a right to direct and control how the work is done through instructions, training, or other means. Employees are generally given instructions on when and where to work, what tools to use, where to purchase supplies, what order to follow, etc.
(2) Financial control covers facts that show whether the business has a right to control the financial and business aspects of the worker's job. This includes the extent to which the worker has unreimbursed business expenses; the extent of his investment in the facilities being used; the extent to which he makes his services available to the relevant market; how he is paid; and the extent to which he can realize a profit or incur a loss.
(3) Type of relationship includes written contracts describing the relationship the parties intended to create; the extent to which the worker is available to perform services for other, similar businesses; whether the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay; the permanency of the relationship; and the extent to which services performed by the worker are a key aspect of the company's regular business.
Reporting Payments Made To Vendors on Form 1099
All businesses make payments to vendors. But are you required to report these payments to the IRS? It depends on who you are making payments to and the amount being paid during the year.
Various types of Forms 1099 must be provided to certain type of payees and the IRS by January 31. Here’s a rundown of some of the more common payments that may require an information return.
1. Payments of $600 or more to contractors or other services providers (other than corporations) must be reported to the recipient and to the IRS on Form 1099-MISC.
2. Rents totaling more than $600 paid to an individual landlord partnership or estate (but not rents paid to a corporation) must be reported on Form 1099-MISC. (However rents paid to a real estate agent are generally not required to be reported.)
These forms must be mailed to the recipient and the IRS by January 31.
If we are preparing Forms 1099 for you we have attached a 1099 Worksheet in order to assist with the gathering of information necessary to file these returns. Please provide us this information as soon as possible after December 31 but no later than January 15 so that we may timely provide the returns to you to be filed.
Bear in mind that the penalties for failure to comply with these information-reporting requirements can be stiff. For example you can be hit with a penalty as high as $50 for each return that is filed incorrectly or is not filed on time.