If you’re self-employed, work as an independent contractor, or operate a business that hires independent contractors to complete work for your company, you’ve likely heard something about a 1099.
What Is a 1099?
While wages and salaries are reported on the form W-2, the earnings of non-employees are reported on a 1099, a series of forms that the IRS refers to as “information returns.”
In short, a 1099 is a tax form for reporting income earned from work performed as an independent contractor, as opposed to a salary or wages paid to an employee.
We’ll discuss the differences between employees and independent contractors in a moment, but the important takeaway here is that as an employer, you’re responsible for issuing 1099s to your independent contractors if you choose to use them.
While independent contractors are required to report their income regardless of whether they receive a 1099 from you, it is important to issue a 1099 if you are paying the contractor $600 or more over the course of their work.
Employees and Independent Contractors: Know the Difference
There are multiple factors that differ between employees and independent contractors, such as how the worker is treated, how they are paid, the type of work they do, and a few other considerations.
Employees are required to have payroll taxes deducted from their checks, be provided Workers’ Compensation insurance, be eligible for Unemployment Insurance, receive a minimum wage and hourly protections, and to be protected under both federal and state anti-discrimination laws.
Independent contractors are not required to be treated according to these same standards; as a result, some employers have taken to using the work of independent contractors to avoid granting them the full benefits they’re entitled to for the work they perform.
If this sounds unethical, it’s because it is, and California law has adapted in response to this practice in an effort to curtail it. Effective Spring 2018, workers classified as independent contractors in California will need to meet all three of the following requirements.
- They must be free from control and direction in the way they choose to meet objectives. This is an important criterion that defines the scope of the contractor’s independence from the company they are working for.
- The work performed must be outside the usual scope of business. This stipulation prevents employers from avoiding granting employee status to workers who are performing the work of employees.
- The contractor must be its own separate business entity, meaning it must file its own taxes as a business, including self-employed workers and sole proprietorships.
Given these recent changes and the strict definition of “independent contractor,” it is often more practical to hire an employee than an independent contractor.
Before classifying someone as a contractor, you’ll need to make sure that they meet all three requirements. If you have any doubts or have to do some intellectual gymnastics to justify their contractor status, they’re likely supposed to be hired as an employee.
Employee Or Contractor: A Practical Example
Let’s say that you need to hire a graphic designer for your company. You don’t need them on a permanent basis, but rather for the occasional project.
In this instance, it’s fine to hire a freelance graphic designer as an independent contractor. If you pay them more than $600 over the course of their work for you, then you will need to issue them a 1099 by January 31st.
However, let’s say that you were a company that needed to hire a full-time graphic designer whose work they control, but didn’t want to provide them with benefits.
Because the company wants control of the employee’s methods and the employee’s work is performed within the regular course of business, independent contractor status for this employee would be unfair in the eyes of the law.
As an employer, it is your responsibility to match your intent to your actions and play by the rules. Anything less can be considered an effort to skirt your legal obligations and could open you up to potential legal repercussions.
When You Need to Issue a 1099
If you routinely work with independent contractors, you will need to provide them with 1099s by January 31 if you paid them more than $600 during the preceding year.
This $600 figure is cumulative, meaning that if you paid the same contractor $300 for one job and $400 for another job a few months later, you have paid them a total of more than $600 and therefore need to issue them a 1099.
Keeping Compliant and Staying Sensible
There are a number of “moving parts” in California’s tightened requirements for independent contractors, and sometimes a person’s employment status may blur the line between employee and contractor.
If you have questions or concerns about your particular situation, it is usually a good idea to discuss it with your attorney. At Semanchik Law Group, we’re happy to work with your individual needs to tailor a solution specific to your circumstances.
Contact us at any time about employment questions or concerns by clicking here.