Some of the most common questions our clients have are regarding hiring independent contractors. 1099’s and independent contractor classification have become high priorities for IRS audits & payroll tax audits; so it is important that all businesses understand their responsibilities when hiring a subcontractor to perform services for their business. We hope you find this list useful with the year-end closing upon us.
1. REQUEST A W9
Whenever a new contractor provides a service for you, request a W9. This provides the information needed at year-end to issue a 1099. If there is concern that a sub-contractor will not return the completed W9, hold onto the payment for their services until the W9 is returned.
2. NO W9 = WITHHOLD 28%
If you do pay a sub-contractor without a W9 on file you are required to withhold 28% for backup withholding. In the case of an audit, if you haven’t withheld the backup withholding on payments to a sub-contractor and they reveal you should have, your business could be liable to pay the taxes that should have been withheld.
3. VERIFY YOU HAVE ALL NECESSARY INFORMATION
When you receive the W9 ensure you have all the information needed by verifying the following:
* EIN is on the W9 if they are classified as an LLC, partnership or a corporation
* SSN and the sub-contractor’s legal name is on the W9 if they are an individual performing the sub-contracted services
4. POSSIBLE EXCEPTION
If a sub-contractor is incorporated you do not need to issue a 1099 at year end (with the exception of attorneys and law firms)
5. REMEMBER YOUR ABCs
There is an ABC test to determine whether a subcontractor should be considered an employee or a sub-contractor. If the worker doesn’t meet all three of the following requirements the worker should be classified as an employee & be put on payroll rather than issued a 1099 at year-end.
Test A – Control or Direction of the work – Does the worker determine their own schedule? Do they establish their own hours?
Test B – Outside Service- The worker’s service is outside the usual course and/or place of business (businesses without a fixed place of business should rely on the usual course of business rule)
Test C – Independent Business or Trade- Does the worker have a separate place of business? Do they have their own workers’ compensation policy? Do they hold their own applicable licenses for their business?
6. SUPPLIES OR PRODUCTS FROM A VENDOR
When you are purchasing supplies or products from a vendor you do not need to issue a 1099 to them. (The only exception to this is when the product is for resale & the purchases exceeded $5,000 to any individual vendor)
7. SUPPLIES OR PRODUCTS FROM A SUB-CONTRACTOR
When a sub-contractor bills you for items purchased & services provided you can issue the 1099 for the total amount paid to them.
8. 1099-QUALIFYING PAYMENTS MUST BE REPORTED
On a business tax return reported to the IRS the following questions have to be answered:
“Did the business make any payments in 2014 that would require it to file forms 1099?”
“If yes, did the business file forms 1099?”
In simpler terms, if you don’t follow the rules for issuing 1099’s, tax preparers are required to let the IRS know when your tax return is filed!
