Tax Tip for Employers: 1099 or W-2?
The deadline to distribute W-2s and 1099s to employees and for businesses to furnish 1099 statements reporting, among other things, non-employee compensation, bank interest, dividends and distributions from a retirement plan is Jan. 31. Here are three determining factors that help employers discern which form to distribute to their employees.
Atlanta, GA, January 23, 2014 --(PR.com)-- Now is the time for employers to be preparing to distribute tax forms to their employees. The deadline to distribute W-2s and 1099s to employees and for businesses to furnish 1099 statements reporting, among other things, non-employee compensation, bank interest, dividends and distributions from a retirement plan is Jan. 31.*
“One issue we see year after year, is the question as to whether a W-2 or 1099 should be used in specific situations,” said Matthew Sanford, director of tax and compliance for Payroll Center, a leading company in online and traditional payroll services for more than 30 years. “In such situations, the IRS give three us three pieces of language that answer the question: W-2 or 1099?”
1) Behavioral Control: Can you control how, where, and when the work of someone will take place? If so, there could be an employee/employer relationship between you and your worker. Going more in depth, if you have to teach or provide training to the worker, or if you can make the call of which way the job will be carried out then you likely have an employee and not a contractor.
2) Financial Control: This tricky piece to the puzzle comes in three parts: is there significant investment required to do the work, who pays the expenses accrued from the work, and who gains from the profit or loss derived from the work? The significant investment is the tricky piece, as the IRS does not like for the worker to have to have you provide them with any equipment to complete the work. If you are at a job and their tool breaks and they borrow yours, then that is obviously not the same thing as you providing them the tool required from the get go.
The easiest way to come to a conclusion on this point is to ask if the worker themselves had to make a significant investment in their business to be able to perform the work. Calculating who pays for the expenses work accrues is a pretty easy piece. If the worker pays expenses out of their pay then they are likely a contractor and not a W-2 employee.
Finally, we look at who stands to gain or lose. If the worker has the ability to make more money by using accruing less expenses and by having better equipment requiring less time, then they are likely a contractor. Contractors almost always have to bid for a job, or at least do a profit calculation to determine if they should even do the work in the first place.
3) The final piece of the classification puzzle is the relationship. When cases of misclassification come up, IRS agents are almost always trying to prove that a relationship existed between the employer and the worker. If you provide your workers with PTA, or other benefits, or if you have a written contract outlining pay, insurance, or pensions, then you have checked a lot of the boxes required to have a relationship with the worker. In this case you should treat them as an employee.
“Taking the time to properly classify your workers can save you a lot of headache, and your business a lot of money,” Sanford said. “The IRS has begun to heavily crack down on employers that misclassify their workers. In fact, they treat the misclassification as if you were evading taxes, and if proven, they will bill you for all of the FICA and Medicare portions you should have paid, along with a heavy amount of penalty and interest.”
The deadline for businesses to mail 1099s and W-2s (along with W-3s) with the IRS, if filing on paper, is Feb. 28. If filing electronically, the deadline to file W-2s is March 31 and April 1 for 1099s.
However, if you use a payroll provider such as ONPAY you can rest easy knowing those filings are taken care of for you. Be sure to check with your specific provider to find out if you need to file those returns yourself, Sanford said.
* The due date is extended to Feb. 18, if you are reporting payments in boxes 8 or 14.
About Payroll Center Inc. (www.payrollcenter.com)
Payroll Center Inc. was founded in 1982 with one simple goal - to provide employers with the best payroll solution possible. For more than 30 years, Payroll Center Inc. has offered traditional payroll services. And with the market evolving and the availability of new, innovative technology, Payroll Center Inc. has advanced by creating ONPAY™, a product built for today's leader. Designed to complement the busy and price-conscious lifestyle of small business owners, ONPAY™ is an online, mobile and on-demand solution. It enables employers to create paychecks or access payroll reports 24 hours a day, 7 days a week. Other services include payroll tax and deduction calculations and payments and a pay-as-you-owe workers’ compensation plan. ONPAY™ now processes $200 million in payroll annually.
“One issue we see year after year, is the question as to whether a W-2 or 1099 should be used in specific situations,” said Matthew Sanford, director of tax and compliance for Payroll Center, a leading company in online and traditional payroll services for more than 30 years. “In such situations, the IRS give three us three pieces of language that answer the question: W-2 or 1099?”
1) Behavioral Control: Can you control how, where, and when the work of someone will take place? If so, there could be an employee/employer relationship between you and your worker. Going more in depth, if you have to teach or provide training to the worker, or if you can make the call of which way the job will be carried out then you likely have an employee and not a contractor.
2) Financial Control: This tricky piece to the puzzle comes in three parts: is there significant investment required to do the work, who pays the expenses accrued from the work, and who gains from the profit or loss derived from the work? The significant investment is the tricky piece, as the IRS does not like for the worker to have to have you provide them with any equipment to complete the work. If you are at a job and their tool breaks and they borrow yours, then that is obviously not the same thing as you providing them the tool required from the get go.
The easiest way to come to a conclusion on this point is to ask if the worker themselves had to make a significant investment in their business to be able to perform the work. Calculating who pays for the expenses work accrues is a pretty easy piece. If the worker pays expenses out of their pay then they are likely a contractor and not a W-2 employee.
Finally, we look at who stands to gain or lose. If the worker has the ability to make more money by using accruing less expenses and by having better equipment requiring less time, then they are likely a contractor. Contractors almost always have to bid for a job, or at least do a profit calculation to determine if they should even do the work in the first place.
3) The final piece of the classification puzzle is the relationship. When cases of misclassification come up, IRS agents are almost always trying to prove that a relationship existed between the employer and the worker. If you provide your workers with PTA, or other benefits, or if you have a written contract outlining pay, insurance, or pensions, then you have checked a lot of the boxes required to have a relationship with the worker. In this case you should treat them as an employee.
“Taking the time to properly classify your workers can save you a lot of headache, and your business a lot of money,” Sanford said. “The IRS has begun to heavily crack down on employers that misclassify their workers. In fact, they treat the misclassification as if you were evading taxes, and if proven, they will bill you for all of the FICA and Medicare portions you should have paid, along with a heavy amount of penalty and interest.”
The deadline for businesses to mail 1099s and W-2s (along with W-3s) with the IRS, if filing on paper, is Feb. 28. If filing electronically, the deadline to file W-2s is March 31 and April 1 for 1099s.
However, if you use a payroll provider such as ONPAY you can rest easy knowing those filings are taken care of for you. Be sure to check with your specific provider to find out if you need to file those returns yourself, Sanford said.
* The due date is extended to Feb. 18, if you are reporting payments in boxes 8 or 14.
About Payroll Center Inc. (www.payrollcenter.com)
Payroll Center Inc. was founded in 1982 with one simple goal - to provide employers with the best payroll solution possible. For more than 30 years, Payroll Center Inc. has offered traditional payroll services. And with the market evolving and the availability of new, innovative technology, Payroll Center Inc. has advanced by creating ONPAY™, a product built for today's leader. Designed to complement the busy and price-conscious lifestyle of small business owners, ONPAY™ is an online, mobile and on-demand solution. It enables employers to create paychecks or access payroll reports 24 hours a day, 7 days a week. Other services include payroll tax and deduction calculations and payments and a pay-as-you-owe workers’ compensation plan. ONPAY™ now processes $200 million in payroll annually.
Contact
Payroll Center Inc.
Jenna Murphy
770-645-4545
www.payrollcenter.com
Jenna Murphy
770-645-4545
www.payrollcenter.com
Contact
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