It is important that businesses correctly determine whether individuals that work for them are independent contractors (1099) or employees (W-2). In a nutshell, employers generally do not have to withhold or pay taxes for independent contractors. They must, however, withhold/pay income taxes, Social Security, Medicare, and Unemployment taxes on employee wages. Therefore, it is critical that employers correctly classify workers to avoid paying penalties.
What’s the Difference?
The difference between an independent contractor and an employee is based on control vs. independence. There are three factors that generally identify the relationship, they are, as defined by the IRS:
- Behavioral Control: Does the company control or have the right to control what the worker does and how the worker does his or her job?
- Financial Control: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
- Type of Relationship: Are there written contracts or employee type benefits (i.e., pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
If the employer is unsure of the relationship, even after considering these questions, the IRS can determine the classification (Form SS-8) for them.
Contractors must still complete a W-9 for employers, but the form employers use to report payments to contractors has changed for Tax Year 2020, from Form 1099 (MISC) to Form 1099-NEC (Nonemployee Compensation). As usual, a copy of 1099-NEC must be provided to the independent contractor and to the IRS by January 31 of the year following payment.
Employees must still complete a W-4 and employers are still obligated to pay and report employment taxes. However, the IRS offering Corona Virus relief to many taxpayers, the most recent being a credit for COVID-related Sick and Family Leave and an Employee Retention Credit. Employers may need to take extra time with their accountants and HR staff to ensure that the credits are properly applied.
How We Can Help
USA Payroll is committed to keeping you up to date with all revisions and updates associated with COVID-related legislation. We have dedicated staff that monitors federal and state legislation and regulation changes that affect taxes, payroll, and other HR related issues. Check back with us regularly for additional updates.