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1099 vs W2

As a business owner, do you ever wonder if you are doing things right in regards to the distinction above? If you answered yes, we at Financial Accounting Services are here to help.

Considering the hefty penalties that come along with misclassification, it is vital to be aware of the many different variables that come into play when distinguishing between an independent contractor and an employee. This article will provide a basic understanding of the key points to focus on when hiring and filing from here on out.

The IRS breaks this question down into three general categories:

  1. Behavioral Control: Does the company dictate how the worker does his/her job? The bullets below outline some examples of what may be taken into consideration when making this distinction.
    – When and where the work will be done.
    – What tools or equipment will be used.
    – Who will be hired to provide assistance.
    – Where any supplies or additional services will be purchased from.
    – Who will perform specific aspects.
    – What sequence the work will be performed in.
  2. Financial Control: Does the worker have a large amount of reimbursed business expenses? Who is responsible for covering fixed ongoing costs towards completing the work? Is the worker available to seek new business on the open market? Is the worker paid a salary/on an hourly basis or are they paid a flat fee for the work? (Exceptions to the last factor would be lawyers, personal trainers, etc. who are independent but paid on an hourly basis.)
  3. Relationship: Does the worker receive employee-type benefits like insurance, 401k, vacation/sick pay, etc.? What does the contract between the company and worker state about the intended relationship?

Although the information above is a great place to start, much like anything else with the IRS, there are countless intricacies that come into play when deciding how to properly classify workers who receive compensation from your company. Please give us a call at (951) 719-1515 if you would like to sit down with one of our tax specialists to ensure your company is in total compliance with the IRS and their regulations.

Written by Nicole M. Albrecht

Nicole Albrecht may be reached at (951) 719-1515 or Nicole@thinkfas.com.

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