If you don’t file 1099s for your contractors, you lose protections from the federal government.
Small businesses hate paperwork.
And small businesses really hate paperwork from the Internal Revenue Service. But you’d better take care of one bit of paperwork from the IRS and do it quickly because an important deadline is approaching: Thursday, Jan. 31.
That’s the deadline for filing the 1099-MISC form.
COLUMN: Taxes are your spinach
MORE: Rhonda Abrams column index
What most people in business simply refer to as “1099s” are the forms businesses must send to any independent contractors they’ve used in the past year.
Perhaps you paid a tech consultant to help you maintain your computers. Perhaps you hired a marketing consultant to manage your Facebook accounts, or maybe you used an electrician to wire new offices.
If you paid any individual $600 or more in 2012, the IRS wants to know about it.
Small businesses like using independent contractors. They provide services on an as-needed basis, giving small companies much-desired help and expertise with flexibility. But the IRS scrutinizes few areas as much as the use of independent contractors.
One way to make sure you stay out of hot water is to be sure to file 1099s for all your contractors on time.
Whom must you send a 1099?
- Any individual you’ve paid more than $600 for services during 2012.
- Anyone — other than a real-estate agent — you’ve paid rents to during 2012.
- Any lawyer to whom you’ve paid more than $600 in legal fees during 2012, whether incorporated or not.
Who don’t you have to send a 1099?
- Employees on your payroll who receive a W-2.
- Corporations. If an independent contractor has incorporated his or her business, or you’ve used a service provider that is a corporation, no 1099 is needed.
- People you’ve hired for personal, nonbusiness, services.
If a company fails to file a 1099 for its independent contractors, it can have serious — and expensive — consequences. That’s because the IRS is on the lookout for companies that abuse independent contractor/employee status.
As a business, you can treat employees in one of two ways: as an employee or as an independent contractor. Many businesses would prefer to treat employees as independent contractors. Here’s why:
If you treat workers as employees, you pay additional taxes: Social Security, Medicare, unemployment, worker’s compensation, and the like, and workers get more protections under federal and state labor laws.
If you treat them as independent contractors, you pay no additional taxes and they get very few worker protections.
Eureka! You like the independent contractor choice better.
Equally obviously, the federal government, states and cities want to make certain that anyone doing the work of an employee gets treated — and protected — as such. It’s also far easier for the IRS to ensure that taxes are paid from employees via withholding than from independent contractors.
Few areas of employment law are murkier than those dealing with independent contractors. IRS guidelines on who qualifies are not crystal clear.
The main issue the IRS tries to determine is who “controls” the worker. Auditors look at three areas:
Behavioral. Does the worker control how he does the work? The IRS looks at issues such as who controls:
- When and where the worker does the work.
- What tools or equipment the person uses.
- Who determines where the person purchases supplies.
- What order or sequence of work to follow.
Financial. Does the worker have a significant investment, such as owning his own tools; can she make a profit or loss; does she make their services available to others, work for other businesses?
The relationship. How permanent is the relationship, do you have written contract, is the worker responsible for his or her own benefits, and is the work performed a critical and regular part of the business?
The IRS is particularly aggressive in pursuing companies that intentionally — or unintentionally — pay workers as independent contractors instead of employees.
But the IRS does provide some protection for businesses that make mistakes in good faith. Agents will look to see whether a business relied on advice of a lawyer or accountant, followed industry practice, treated workers consistently.
But, and this is important, a company that fails to file a Form 1099 for an independent contractor has absolutely no protection.
So don’t let Jan. 31 slip by without getting those 1099s in the mail.
Rhonda Abrams is president of The Planning Shop and publisher of books for entrepreneurs. Her most recent book is Entrepreneurship: A Real-World Approach. Register for Rhonda’s free newsletter at PlanningShop.com. Twitter:@RhondaAbrams. Facebook: facebook.com/RhondaAbramsSmallBusiness.Copyright Rhonda Abrams 2013.