Who Qualifies as a 1099 Employee?
Setting up a business is an incredibly difficult undertaking. There are so many things to think about and account for before you even make your first dollar. One important aspect in that process is finding qualified people to make up your team to ensure you are as successful as possible.
A key question to consider before hiring is what type of employees they will be. In this article, we'll go over what a 1099 employee is, how to determine if they are one, and what that means for them and the business itself.
1099 independent contractors – what are they and why do you need them?
1099 independent contractors are self-employed individuals who provide services to businesses. They are hired by companies as independent workers, meaning they don't have a traditional employer-employee relationship with the business that hires them. 1099 independent contractors are responsible for filing their own taxes, providing their own benefits, and ascertaining their own work hours.
Determining if someone is a 1099 contractor
Determining what makes someone an independent contractor vs. a standard employee can be a difficult process to navigate since it can be fairly vague. The biggest determining factor is based on the overarching relationship the business and the independent contractor have as well as the amount of oversight or control an employer has over their work. The IRS breaks it down into three categories:
Behavioral: Does the company have a say in both what the worker does and how he or she goes about completing those duties?
Financial: Does the payer have control over how the worker is paid, whether their expenses are reimbursed, and who provides them with tools/supplies?
Type of Relationship: Are there legally binding documents or employee benefits (such as retirement plans, insurance, paid vacation, etc.)? Will the working relationship continue, and is the type of work performed crucial to the business?
Once you figure out if a person falls under a 1099 employee classification or not, be sure to document those factors for your records so you have a baseline if you bring on more independent contractors in the future.
What is a 1099 form and why do you need to file one?
A 1099 form is a tax form used to report income to the Internal Revenue Service (IRS). 1099 forms are primarily used for independent contractors and sole proprietors, as well as other businesses that make payments to non-employees. The 1099 form helps the IRS track income and taxes from individuals who do not have an employer withholding taxes from their paychecks.
There are several types of 1099 forms, depending on the type of payment made. Form 1099-MISC, for example, reports non-employee compensation such as fees, commissions, rents, or prizes. 1099-INT is used to report interest income while 1099-DIV reports dividends and other distributions from brokers or mutual funds. Other 1099 forms include 1099-G (for government payments), 1099-R (distributions from pensions or annuities), and 1099-C (cancellation of debt).
Businesses that issue 1099s need to file one with the IRS each year by January 31st. In addition, they must provide a copy of the 1099 form to the contractor or recipient of the payment no later than that same date. This allows taxpayers time to prepare their tax returns in order to avoid penalties for underpayment of taxes due.
In addition to filing a 1099 form with each payment recipient, businesses must also submit a copy of all 1099s issued during the year along with Form 1096 showing totals for each type of payment made. This form is sent directly to the IRS instead of being provided to contractors or recipients like how copies of 1099s are sent. This ensures that all business payments are tracked properly by the federal government.
Filing a 1099 may seem overwhelming at first but it’s an important part of running any business legally and ethically—both in terms of taxes owed and helping keep accurate records for employees or independent contractors you hire throughout the year. With proper preparation and understanding of how these forms work, you can ensure that your business meets all requirements when it comes time to file your taxes each year.
The benefits of a 1099 employee
Businesses might utilize 1099 independent contractors because they provide flexibility in staffing needs and cost savings. 1099 independent contractors can be hired for specific projects or tasks without any long-term commitment from the business. This eliminates the need to pay benefits such as health insurance or vacation time that an employee would usually receive from an employer. 1099 independent contractors also cost less than hiring full-time employees because no taxes are taken out of their payments, and there is less paperwork involved in hiring them.
Additionally, 1099 independent contractors can bring valuable expertise and experience to businesses that may not be available in a full-time staff position. 1099 independent contractors often specialize in one particular area and may be more knowledgeable than other employees in that area, making them ideal for unique or short-term projects where specialized skills are needed quickly. 1099 independent contractors also often have access to the latest technology or software which again makes them ideal for specialized projects or tasks that require cutting-edge solutions.
Finally, 1099 independent contractors can help businesses stay competitive by providing innovative solutions to complex problems quickly and efficiently without having to commit long-term resources or personnel. This allows businesses to move forward faster while saving money on overhead costs associated with full-time staff and benefits packages. By utilizing 1099 independent contractors wisely, businesses can remain agile and competitive in today's ever-changing business climate.
The drawbacks of 1099 contractors
Although 1099 independent contractors can provide businesses with many benefits, there are some drawbacks to be aware of when hiring them.
1099 independent contractors are also often more expensive than regular employees because they do not receive employer contributions to their Social Security or Medicare taxes.
Another drawback of 1099 independent contractors is that they can be difficult to track in terms of hours worked or tasks completed. 1099 independent contractors may not keep regular business hours, so it can be hard for a business owner to know how much work has been done or if the contractor is delivering on expectations. Businesses will need to establish methods for tracking 1099 independent contractors and hold them accountable for meeting deadlines.
Businesses may also run into legal issues when working with 1099 independent contractors such as misclassification of workers or failure to pay taxes on income earned through 1099s. In order to avoid these issues, businesses must ensure that 1099 independent contractor agreements are properly documented and that all applicable taxes are being paid on time. Businesses may also wish to consult with a lawyer if they have any questions about the legality of using 1099 independent contractors in their business operations.
Lastly, 1099 independent contractors may require additional administrative paperwork which can take time away from other tasks a business might need to complete. Businesses must file 1099 forms with the IRS each year and provide copies directly to contractors as well all before the January 31st deadline each year.
Additionally, businesses must complete Form 1096 summarizing 1099 payments made throughout the year in order for the IRS to accurately record all payments made by businesses during tax filing season. All this extra paperwork takes time away from managing other aspects of a business but is necessary in order to remain compliant with IRS regulations surrounding 1099s and payment reporting requirements.
Final Thoughts
1099 employees can be a great way to reduce costs for businesses, but it's important to understand the rules and regulations around using 1099 workers. In this article, we've outlined what you need to know about 1099 employees, including how to determine if someone is a 1099 worker as well as both the benefits and drawbacks they may bring when involving them in your business.
We hope this information helps you make the most informed decisions when it comes to your business' finances. If you have any questions about your business' accounting needs, please contact us today.
Hasenbank Accounting Services provides remote accounting support to Managed Service Providers and IT businesses. With over 27 years of accounting experience and 23 years supporting the IT industry, we are focused on making the financial aspects of your MSP business one less thing to worry about. Contact us today to see how we can help you.