When Is a 1099 Required?

when-is-a-1099-required

ANSWER:

A 1099 is required for independent contractors.

More Info: Most people are familiar with a W-2 form; it declares gross annual income from one employer and various withheld amounts, and employees receive them annually. But not all working people need a W-2 form. Independent contractors need a Form 1099 instead.

Employee or Contractor?

Each state has different exact criteria that must be met to classify a worker as an employee instead of an independent contractor. The Internal Revenue Service (IRS) has its own standards that states often use as guidelines in their own statutes.

Terms

The word “business” pertains to the entity through whom the worker receives work assignments and payment for services.

The term “worker” pertains to the person or entity receiving assignments and payment for services rendered.

Determining Factors

The Internal Revenue Service has several primary determination points to clarify employee or independent contractor status. All conditions must apply when employee status may be appropriate.

Behavioral control: When a business directs the method of completing a job task, what tools or implements to use, and where to purchase supplies and equipment. Who is hired to assist in task completion. If a worker receives instruction on what needs to be done but not how, the worker is probably an independent contractor. Where or when a task should be completed is insufficient to declare contractorship.

Training: If the business provides training regarding procedures or methods to complete a task, the business implies that the worker is an employee.

Financial control: Three sub-facets within this category help determine status:

  1. Significant Investment: If the worker has a large financial investment in the work, the worker might be an independent contractor. However, there is set dollar amount in the determination, and investment alone does not determine status.
  2. Expenses: If the worker invests non-reimbursed funds into the operation or maintenance of equipment necessary to perform the work, the worker might be an independent contractor.
  3. Profit or Loss Opportunity: If the worker has opportunity to experience either profit or loss through assigned tasks, odds are that the worker is a contractor, not an employee.

Relationship: If a contract outlining each party’s understanding of their relationship exists, the worker is probably a contractor. Documents identified as an employment contract do not qualify in this category. If the business provides benefits, including medical, dental, or vision plans, retirement funds, paid vacation and holiday time, etc., the worker is probably an employee.

 

 

Resources

Department of the Treasury, Internal Revenue Service; Publication 1779 (Rev. 8-2008) Catalogue Number 16134L, “Contractor or Employee…”, found at: http://www.irs.gov/pub/irs-pdf/p1779.pdf

Department of the Treasury, Internal Revenue Service; “Topic 762 – Independent Contractor vs. Employee,” found at: http://www.irs.gov/taxtopics/tc762.html

Steven Fishman, J.D., © 2008; “Working for Yourself: Law & Taxes for Independent Contractors, Freelancers, & Consultants.”

Simple Subjects, LLC; “Surprisingly Simple: Independent Contractor, Sole Proprietor, and LLC Taxes Explained in 100 Pages or Less.” © 2009; by Mike Piper.

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