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Do you know how your Employees should be classified for tax purposes? It is extremely important to know which form you should be filing.

Ed McLeod

October 23, 2020

When hiring new employees to your business, you must determine if it is for an independent contractor or a regular employee.  This is very important as the choice you make has major tax implications.

  • Why would you file a W-2 Form? When you hire a full-fledged employee for your company, you must file a W-2 tax form.  According to the IRS, you must file a W-2 form if you “withheld any federal income tax, Social Security tax or Medicare tax from wages, regardless of the amount of wages.”

  • Why would you a file the 1099 form? If your company rely on independent contractors, you should familiarize yourself with the 1099 form.  With the 1099 form, you do not withhold taxes from the pay of your independent contractors.  Instead, you will file the brand new 1099-NEC (Nonemployee Compensation) Form with the IRS showing exactly what you paid to the independent contractor.  Prior to 2020, this information was reported on Form 1099-MISC.

    If a business pays more than $600 to an independent contractor, it must file a 1099.  When a business files Form 1099-NEC, Copy A goes to the IRS and Copy B goes to the independent contractor by January 31 in the following year.

Choosing which way to pay a worker and which form to file is not a matter of personal preference or deciding which method is more economical for you but is governed by IRS rules.  According to the IRS, a worker’s classification is based on how much control the business has over them.  For companies to determine this, the IRS recommends that the employers consider the following questions:

º Who has control over the worker’s responsibilities and hours?

º Does the business control the financial aspects of the worker’s job?

º Has a contract been signed, or does the employee receive benefits?

º Is there a degree of permanence to the worker’s duties at the company?

º How important is the employee’s work to the company’s continued operation?

  • Misclassification will be costly. If a business or the IRS determines that employee(s) were in fact misclassified, the business will be required to reimburse lost wages, cover back taxes as well as penalties and interest for federal and state levels, pay for insurance costs, and may have to provide the employer with various benefits package – retirement and health insurance.

  • Do you know how and when you need to file your 1099 or W-2 Forms? At SBC-CPA we have a Full-Service Payroll division and as your experienced payroll partner, we will handle all of your needs, including check processing and printing, direct deposit, W-2 and 1099 processing, filing up-to-date quarterly and annual payroll taxes, and reporting. We can also provide guidance to help you determine the right way to pay your workers for their various roles and functions, avoiding later punitive costs for any misclassifications. Better yet, all services are offered electronically, saving you time, money and reducing costly mistakes. Your employees will enjoy secure online access to their paycheck stub information and W-2s or 1900-NECs —eliminating hours of distribution time.

  • For more information on the difference between an Independent Contractor or Employee, please go to our article at the following link - https://www.sbc-cpa.com/uploads/JL9If24NTPWiCLtgG6/Independent_Contractor_vs_Employee.pdf

  • For more information on SBC-CPA payroll services, please go to the following link - https://www.sbc-cpa.com/services/payroll/

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