When hiring, you may find yourself considering whether to hire a new employee as just that, an employee, or hire them as a 1099 independent contractor. Before you make a decision, know that there are specific guidelines surrounding each type and what your requirements are to remain compliant.
An employee is someone who works under your direct or indirect supervision, following hours and conditions you specify, with payroll taxes withheld from their wages. As their employer, you cover certain taxes as part of their employment expenses.
On the other hand, independent contractors provide services at a negotiated fee and typically meet these criteria:
- They operate under their business name.
- They invoice you for each service.
- You exert no control over their work hours or tools.
- They offer similar services to others.
- They lack significant organizational roles like employee management.
- A contract outlines their services.
- They supply a business license number issued by their city.
- They may hold state-specific licenses (e.g., doctors, lawyers).
Correctly classifying workers is crucial; misclassification could lead to audits and penalties. If an individual labeled as an independent contractor is deemed an employee, you may face back taxes, penalties for unreported earnings, and interest on overdue withholdings.
For employers hiring independent contractors, it’s essential to:
- Ensure contracts clearly define services and expectations.
- Maintain records of contracts and payments.
- Verify licenses and business credentials.
- Understand state-specific regulations regarding independent contractors.
- Prepare 1099’s on time.
Proper classification not only mitigates risk but also ensures compliance with tax and labor laws.
Tax Nuances Can Be Overwhelming
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Joy Lutz, CPA, CTP
I help our client’s keep more money in their pockets by implementing proactive tax strategies.
I promise you, working with a CPA and Certified Tax Planner can be much more exciting than crunching numbers and reviewing last year’s taxes.