Payroll Compliance

 Letter

If you operate as a Corporation, Partnership, Schedule E (rental real estate) or Schedule C (sole-proprietor), when you sign your tax return you are attesting to the fact that you are in compliance with IRS regulations that cover the filing of information returns. It is critical that business owners correctly determine whether individuals providing services are employees or independent contractors. The IRS can impose substantial fines for non-compliance and force you to reclassify workers and pay back taxes. It is our goal to protect your assets and ensure that you are in compliance with worker classifications and filing the correct information returns with the IRS. Below is a summary of important topics that pertain to worker classification and reporting on Form 1099-MISC.

Employee or Independent Contractor? 

In most circumstances, you must withhold income taxes, withhold and pay Social Security and Medicare taxes and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors.

The IRS defines an independent contractor as people who are in an independent trade, business or profession in which they offer their services to the general public, i.e., doctors, dentists, veterinarians, lawyers, accountants, contractors, subcontractors, public stenographers or auctioneers. Whether or not these people are independent contractors or employees depends on the facts in each case. The rule of thumb is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. The earnings of a person who is working as an independent contractor are subject to Self-Employment Tax.

A person is an employee if they perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if the worker is given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed.

In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered.  

• Behavioral: does the company control or have the right to control what the worker does and how the worker does his or her job?
• Financial: Are the business aspects of the worker's job controlled by the payer (these include things like how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)?
• Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no "magic" or set number of factors that "makes" the worker an employee or an independent contractor and no one factor stands alone in making this determination. Factors which are relevant in one situation may not be relevant in another.

The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control and finally document each of the factors used in coming up with the determination.­­­­­­­­­­­­­­­­­

Form 1099-MISC Compliance

Payments for services rendered by independent contractors fall under the general rules for reporting payments of $600 or more made in the course of the payer's trade or business and an information return must be filed.

The Form 1099-MISC reporting rules apply to any business that makes a reportable payment in the course of its trade or business. Personal payments are not reportable. A payer is engaged in a trade or business if the payer operates for a gain or profit. Some payments do not have to be reported on Form 1099-MISC, although they may be taxable to the recipient.

Payments for which a Form 1099-MISC is not required include, but are not limited to, all of the following:

• Generally, payments to a corporation do not require Form 1099-MISC - with the following exceptions:
  • Medical and health care payments
  • Fish purchases for cash
  • Attorneys' fees
  • Gross proceeds paid to an attorney
  • Substitute payments in lieu of dividends or tax-exempt interest
  • Payments by a federal executive agency for services
• Payments for merchandise, telegrams, telephone, freight, storage and similar items 
• Payments of rent to real estate agents - but the real estate agent must use Form 1099-MISC to report the rent paid over to the property owner
• Reportable Rents
• Real estate rentals paid for office space
• Machine rentals
• Pasture rentals
• Wages paid to employees (reported on Form W-3/W-2)
• Business travel allowances paid to employees
• Cost of current life insurance protection
• Payments to a tax-exempt organization including tax-exempt trusts (IRSs, HSAs, Archer MSAs and Coverdell ESAs)
• Canceled debt (reported on form 1099-C)
• Employee business expense reimbursements 

Recipient copies of Form 1099-MISC must be furnished to the recipient by January 31st and the reportable copy must be filed with the IRS by February 28th.

As practitioners, the IRS requires us to inquire of our clients if any payments during the year in excess of $600 have been made that require the filing of Form 1099-MISC.

Please contact us if would like us to assist you in the preparation of Form 1099-MISC or if you have questions or concerns regarding the classification of workers. You may also visit the IRS website at www.irs.gov for more information.