INDEPENDENT CONTRACTOR GUIDELINES
The classification of your workers as “employees” or “independent contractors” remains a “hot topic” with the IRS, even though some guidelines have been have been released intending to simplify this area.
A) Form 1099 should be mailed by January 31st each year to all independent contractors (individuals, partnerships, LLPs and LLCs; but not corporations) whom you paid at least $600 cumulative during the previous year. Form 1096 (summary) should be filed with the IRS with copy A of the Forms 1099 by February 28th each year. Please note that the Franchise Tax Board no longer requires copies of these forms. The IRS forwards the information to the Franchise Tax Board.
B) A special rule applies to payment to attorneys for legal services. The exception for reporting payments to corporations no longer applies to payments for legal services. Therefore, payments for attorney services of $600 or more are reportable on Form 1099 even if the attorney is incorporated. Additionally, if you make a payment in the course of your business to an attorney in connection with legal services (for example, to settle a claim) and the portion for the attorney’s fee cannot be determined, the total gross proceeds paid to the attorney must be reported on Form 1099, Box 13, with Code A.
C) Beginning with the 2001 tax year, California implemented a new law that requires a business and government entities to report independent contractor information to the Employment Development Department on an ongoing basis during the year. This information should be reported within twenty days of either making payments totaling $600 or more or entering into a contract for $600 or more, whichever is earlier. According to the Employer Development Department, this information will be used to assist with child support collection. As a result, penalties will be assessed for noncompliance. You should be aware that this reporting requirements is in addition to your year-end 1099 filing requirements and is an annual filing requirement. This means that even if the business reported the independent contractor in a previous year, the contractor must be reported again the following year if requirements are met for that year. Form DE 542 Report of Independent Contractor, should be used. Please note that you are not required to report independent contractors that are corporations, general partnerships, limited liability partnerships, and limited liability companies.
D) Companies must obtain the independent contractor’s identification number at the beginning of the calendar year (or inception of services) or implement 30% backup withholding immediately. You may use IRS form W-9 to request the number.
E) Owners, controllers, bookkeepers, or other fiduciaries may be held personally liable for unpaid taxes or unpaid backup withholding.
F) Over the years, a list of 20 factors has been developed to determine whether a worker is an employee or an independent contractor. The IRS has stressed recently that these factors are to be used as an analytical tool only and that there is no “magic” number or relevant points. The factors fall into three major categories: behavioral control, financial control, and the type of relationship of the parties. The presence of the following items tend to indicate that the worker is an employee:
- The worker complies with employer’s instructions about the work.
- The worker receives training from or at the direction of the employer.
- The worker provides services that are integrated into the business.
- The worker provides services that must be rendered personally.
- The worker hires, supervises and pays assistants for the employer.
- The worker has a continuing working relationship with the employer.
- The worker must follow set hours of work.
- The worker works full-time for the employer.
- The worker does work on the employer’s premises.
- The worker does work in the sequence set by the employer.
- The worker must submit regular reports to the employer.
- The worker receives payments of amounts at set intervals.
- The worker receives payments for business and or travel expenses.
- The worker relies on the employer to furnish tools and materials.
- The worker lacks a major investment in facilities used to perform services.
- The worker cannot make a profit or suffer a loss from services.
- The worker works for only one employer at a time.
- The worker does not offer services to the general public.
- The worker can be fired by the employer.
- The worker may quit work at any time without incurring liability.
G) Other points that may be considered in determining whether a worker is an employee or an independent contractor include whether there is a written contract, whether the business provides the worker with employee-type benefits (insurance, pension plan, vacation pay), and whether the services performed by the worker are a key aspect of the regular business of the company.