Happy New Year! REMINDER: All W-2 and 1099 forms are due by January 31st, 2012!
When someone completes work for your business, are they an employee or an independent contractor? Do you issue them a W-2 or a 1099 form?
This is a challenging question faced by many business owners due to the fact that there is no definitive guidance on the issue. The IRS and EDD will look at each case on an individual basis taking into account several factors. Having workers classified correctly is extremely important, given the fact that some independent contractors are now reporting businesses so they can be re-classified as employees and receive unemployment benefits.
How can a business protect itself? Ultimately, the government is looking at control. How much control is the worker able to exercise over their own work? The questions that will be asked during an audit will be:
- Does the worker own their own entity? And their own business license?
- Does the worker advertise for other clients?
- Does the worker have other clients?
- Does the worker have the opportunity to control their profit/loss?
- Has the worker invested in their business?
- How much instruction and training was given to the worker?
- Does the worker have control over how they perform the work (hours, location, etc)?
- Do the parties have a written agreement between them defining their relationship?
The consequences of misclassification are that your business may be audited. If the audit results find that the workers were actually employees, then your business would be liable for penalties and interest, as well as, potential workers compensation fraud issues. If you believe that you may have employees classified as independent contractors, we can help you apply for an IRS safe harbor program to prevent the IRS from retroactively classifying your workers as employees.
If you would like an assessment of whether you have employees or independent contractors, please call Janathan L. Allen, APC at 866-631-3470 for a consultation. In the event that your business uses independent contractors, you should have a written agreement that details the relationship of the two parties. Our firm is experienced in drafting employee and/or independent contractor agreements. We also provide assistance for businesses currently under audit for misclassifying workers.