1099 Status: Everything You Need to Know
1099 status refers to an individual’s status as a self-employed contractor or business owner for whom a 1099 form must be filled out for by the contracting party and filed with the IRS. 3 min read
2. 1099 Contractor Responsibilities
3. 1099 Status Qualifications
4. 1099 Employee Misclassification Consequences
1099 status refers to an individual’s status as a self-employed contractor or business owner for whom a 1099 form must be filled out for by the contracting party and filed with the IRS. The 1099 form records the amount of money paid out to the contracted party and is thus a means for the IRS to keep track of the income of self-employed individuals as well as where certain taxes should be coming from. Companies that attempt to deceive the IRS as to the status of their workers may meet with serious consequences.
1099 Employer Responsibilities
A company contracting 1099 workers must meet the following responsibilities:
- Report pay to 1099 workers on a 1099 form to the IRS.
- Keep accurate records of the payment amounts and payment dates.
- Provide a 1099 form to the contractor by the final day of January that details the work they performed in the previous year.
1099 Contractor Responsibilities
1099 contractors have their own responsibilities to meet concerning their status, and those are:
- To pay all taxes, including Medicare and Social Security payments, to the IRS.
- In some cases, make quarterly income estimates and submit them to the IRS.
1099 Status Qualifications
There are strict IRS guidelines as to what can be considered a self-employed contractor, and these are:
- The company cannot control how the worker performs their job.
- The company cannot control financial details related to the job.
- The company cannot offer the worker benefits, such as paid vacations, a retirement plan, or health insurance.
In sum, the question of whether a worker is a self-employed contractor or not comes down to whether a company can exert behavioral, financial, or relational control over the worker. If a worker’s status is still in doubt, the following questions may be considered:
- Does the worker determine their schedule and work location?
- Does the worker receive training from the employer?
- Does the worker have employees?
- Does the worker determine the sequence of the service they give?
- Does the worker determine the reporting they will give the company?
- Does the worker submit invoices?
- Does the worker pay for their own travel and business expenses?
- Does the worker provide their own materials and tools?
- Does the worker run their own business?
- Does the worker run advertising for themselves?
- Does the worker have multiple clients?
- Does the worker provide their own insurance?
- Does the worker have a temporary or open-ended relationship with the company?
If the majority of these questions can be answered in the affirmative, then more likely than not, the worker is a self-employed contractor.
1099 Employee Misclassification Consequences
The determination of whether a worker has 1099 status should be considered carefully and made correctly, because the consequences of misclassification can be quite severe. If a company classifies an employee as an independent contractor rather than an employee, the consequences can include:
- The employer being required to pay all the taxes that were required to be withheld, in addition to a penalty fine.
- The state government seeking the unemployment insurance and workers’ compensation insurance premiums that ought to have been paid.
- The worker pursuing legal action to receive compensation for payroll tax contributions, employee benefits, and overtime.
Some companies attempt to skirt the line on independent contractor work for employees, while others are actively deceptive, since there may be significant savings in avoiding hiring salaried employees. In fact, it is estimated that 20 percent of businesses have misclassified workers intentionally or unintentionally. Because of this high number of misclassification and the money that can be saved fraudulently by doing so, the consequences of being caught are designed to be even more costly. For example:
- The Orange County Register was forced to pay $22 million in a suit involving workers being misclassified as independent contractors.
- Three construction companies were ordered by the Department of Labor to pay $491,000 in damages and back pay, along with another $108,000 in civil fines, due to worker misclassification.
- A major shipping company was fined $319 million by the IRS and ordered to pay $27 million by a court due to worker misclassification.
It is best not to risk worker misclassification, even if you have no intent to deceive. If you need help understanding 1099 status, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.