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Payroll Taxes

Basics For Filing Independent Contractor Paycheck Form 1099-MISC for Small Businesses

January 6th, 2016

When is 1099-MISC form required? 

1099-MISC form is required by the IRS to report payments you made to a person during a calendar year for rent, services (not an employee), prizes and other miscellaneous items.  The most common purpose of a 1099-MISC form is to report payments made to business contractors as opposed to paychecks issued to employees.

Independent contractors & 1099-MISC forms  

If a company paid more than $600 a year to an independent contractor then the company needs to issue a 1099-MISC to the contractor by the end of January (1/31) and file the information to the IRS before the end of February (2/28).  If the 1099-MISC is e-Filed, the filing deadline is extended to the end of March (3/31).  If a contractor is incorporated, the company does not need to issue a 1099-MISC.

To verify the tax ID and determine if a 1099-MISC form is required, it is important to have an independent contractor fill out a form W-9.

Not sure if you need a 1099-MISC or not?  Read on – understanding  the difference between an employee and a contractor is key. 

It is critical to understand the difference between an employee and a contractor.  When a company hires an employee, the employer is required to follow strict payroll regulations to withhold and deposit payroll taxes and file payroll reports regularly. The employer is required to follow applicable labor laws regarding overtime, sick leave, healthcare and other employee benefits.  On the other hand hiring a contractor does not require any of these efforts by the company.

For an employee, the employer is required to match Social Security taxes, Medicare taxes, pay for Unemployment Insurance and other applicable Federal and State employment taxes. For an independent contractor, a company is not responsible for any of these taxes. For these reasons many companies choose to hire contractors, and that is also why the IRS is very sensitive to misclassification of employees as contractors.  The penalty for misclassification of employees as contractors can be severe.  The other point is that misclassification deprives a worker of critical benefits and protections like minimum wage, overtime, medical leave etc.

There are many criteria and tests to determine if a worker is an independent contractor or an employee. You can visit the IRS website for more detailed discussion. Generally, the key is control.

  • Does the company control the worker’s schedule, place of work, how to work, processes & methods, etc.?
  • Does the company determine how the worker is paid, what expense is reimbursable, who pays for the tools or supplies?
  • Are there any contract or employee types of benefits (pension, insurance, vacation, etc.)?

All factors should be considered and some may not be definite. For example, UPS drivers are employees while Fed Ex drivers used to be independent contractors. Recently in 2014, the Ninth U.S. Circuit court of Appeals in San Francisco ruled that the drivers of Fed Ex in California are employees.

Based on these criteria you need a 1099-MISC form for an independent contractor.  Otherwise, a W-2 form is required for an employee.

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