QUESTION:
Dear Taxman – I have a small business and I am not sure if I should give my workers 1099’s or W-2’s. Can you tell me how to determine which way to go?
ANSWER:
Dear Reader – It’s not uncommon for small business owners to be confused about the right way to handle their workforce when it comes to 1099’s and W-2’s. What makes it even more complicated is that the IRS is increasingly starting to crack-down on small businesses who are misclassifying people who work in their companies.
To break it down for you, here are some guidelines regarding when you know your worker is an employee (W-2) and not a contractor (1099):
- If you tell someone where to go, when to go and how to do their job – they are an employee
- If the person(s) are not bidding on the work – they are an employee
- If most of their income comes from you paying them – they are an employee
The best way to protect yourself from having to pay all back payroll taxes plus penalties and interest for misclassifying someone is to require contractors (1099) to show proof (like a bank statement) that they are paying deducted payroll taxes or self employment quarterly estimated payments. If you can show the IRS that they got their share, and that you were looking out for them by requiring proof of payments, you might get by with a warning.
“Ask The Taxman” originally appeared as a column in The Brunswick Citizen. All responses are written by Jim George, CPA. If you have a question for a CPA, contact us!