1099 Status Requirements: Everything You Need to Know
Checking 1099 status requirements is a fundamental step in the hiring process as it properly classifies staff members as employees or contractors.4 min read
Checking 1099 status requirements is a fundamental step in the hiring process for all businesses. Proper classification of staff members as employees or contractors will protect you from penalties and possible lawsuits.
1099 Status Requirements
Today's labor market has changed immensely due to high-tech advances, fewer staff constraints, and developments in management style, including project control and more choices for hiring staff.
A contract worker is a temporary employee hired for a specific project or for a certain period of time, depending on business demand. These workers are required to fill out 1099-MISC tax forms. Companies save money by hiring freelancers because they are not required to provide them with benefits and insurance. Independent contractors are also responsible for paying their own taxes at the end of the year. However, there are downsides to 1099 workers. Managers have limited control over employees, only controlling the end results of the work.
Full-time employees fill out a W-2 tax form, which requires the company to deduct taxes every paycheck. Pros include monitoring of work, performance, and conduct in the workplace as well as easy taxation. However, full-time employees are costly. The company is required to provide insurance and benefits.
Deciding if staff members are 1099 or W-2 workers is a vital step in the hiring process and can cause serious complications if done incorrectly. Business owners need to be aware of labor laws to determine employment status properly. Advice from an account can help to eliminate mistakes.
The IRS sets strict laws to protect workers and enforce punishments, including fines for classifying workers incorrectly. The Trust Fund Recovery Penalty results when a company mistakenly hires someone as a freelancer when they should be a documented employee. This fine collects taxes and benefits from the owner, such as Social Security, Medicare, and federal income tax.
The IRS now advises businesses to look at the big picture, including laws and guidelines listed below.
Expense and pay role responsibilities differ between contract and full-time employees:
- 1099 workers pay their own taxes at a 15.30 percent rate, which is much higher than full-time employees.
- W-2 workers are taxed by the company at a rate of 7.65 percent per paycheck.
Work requirements help employers decide between W-2 or 1099 workers.
Full-time employees receive the following benefits:
- Retirement plans.
- Employment contracts.
- Performance and productivity control.
- Overtime option.
It is likely for a business to incorrectly classify an employee, leading to expensive penalties and fines. Having a clear hiring procedure, a detailed job description, and abiding by labor laws helps to avoid these risks.
The company must pay the following if they categorize a worker incorrectly:
- Income tax:
- The employee's 20 percent of FICA taxes in addition to the employer's share, of which they lose all recovery rights.
- Fines are doubled, employment benefits must be paid, and the employer can face felony charges.
Workers are not considered as freelancers solely because they are requested to be. IRS Form SS-8 helps to establish employment type and verifies deductions on a paycheck.
The Safe Harbor — §530 of the Revenue Act of 1978 excludes a company from penalties as long as the company has a logical reason for hiring 1099 workers. The following are considered logical reasons:
- Tax purposes.
- The company has used contracted workers often in the past.
It is vital for the company to have all independent workers file a 1099-MISC form. Companies that comply with most of the prerequisites are allowed to correct their mistake and reclassify workers under the IRS Classification Settlement Program.
Defining the Employer-Employee Relationship
Full-time employees must abide by all company rules. Performance and office conduct are monitored and evaluated closely.
- Full-time employee requirements:
- Predetermined hours.
- A set schedule.
- Projects, work demands, and prerequisites are clearly defined and monitored by management.
- Employers are responsible for supplies, education, and training.
- Freelancer requirements:
- Flexible work schedule made by the contractor.
- Jobs are demand-based.
- Contractors are responsible for their own means and supplies.
- Ability to work for multiple companies.
1099 Rules for Business Owners in January 2018
1099-MISC forms are used for contractors, subcontractors, lawyers, and non-U.S. citizens to verify employment and income.
1099 form exclusions include:
- S and C-Corporations, LLCs, and merchandisers.
- Storage, freight, and rent expenses.
- Online payment transactions using debit, credit, gift cards, or PayPal.
It is advised that business owners preorder 1099 forms so they are readily available. Forms are to be submitted to the IRS along with a 1096 form. If a company has 250 forms or more, they may file the paperwork electronically.
If you need help with 1099 status requirements, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.