Independent Contractor Compliance Blog - by Collabrus™

What’s wrong with saying, “He’s a 1099″ or “She’s a W-2?”

How many times have you’ve been in a business meeting and heard someone say something like, “Oh, he’s a 1099, so we don’t need to worry about his taxes…” or “We’re going to 1099 this person…”

It’s used as a convenient colloquialism, but once the magic words are whispered, everyone sagely nods, and many important decisions and consequences flow from that point. Often, in my field experience with Collabrus client companies, I’ve heard these words said. It is often used as a shorthand expression, without the speaker knowing the facts or the logic that should be applied to support the conclusion, and therefore are not challenged.

Don’t let a “shorthand expression” mislead you

Such casual, unsupported statements are a primary reason that many consultants are misclassified. Someone says “they’re a 1099″ or, “they’ve always worked as a 1099,” without considering the actual legal criteria that would qualify the consultant as an independent contractor on the particular job at hand.

Hearing those words, no one bothers to verify the individual’s status as an independent contractor, or the nature of the project, or the day-to-day working relationship. Later, if challenged in a tax audit or legal action, there is no documentation for the consultants’ IC status and the company finds itself scrambling to build justification for the decision.

The actions and consequences have grown from a colloquialism, which translated means,

“The consultant is a tax reporting form.”

That’s right-a 1099 MISC is an IRS reporting form to report payments to IC’s-not a legal status determination. The Form 1099 is required to report payments made to independent contractors who you pay in excess of $600 to perform services for your business. It is also required when you pay an attorney for business related services, who is not your employee, even if they are incorporated. All sole proprietors and partnerships that provide personal services to your business must also be reported on this form.

A 1099 MISC is a tax form-not a status determination. 

Just saying someone is “a 1099″ does not make them an independent contractor.

First, you must use common law rules to decide if the consultant is an independent contractor or employee. That is how the IRS decides if someone is an IC or an employee. The IRS follows the “Three Elements of Law” which actually break down into the old “Twenty Factors.” Once a consultant and the working relationship is evaluated using those factors or elements then the appropriate reporting form is selected as a consequence.

Either:

• 1099 MISC for an IC, or
• Form W-2 for an employee.

Remember, the tax reporting forms are only one of the consequences resulting from the legal determination. Be careful that you don’t let the tail (the 1099 and W-2 tax reporting forms) wag the dog (the correct employee classification of employee or independent contractor)!