As of July 2017, the IRS released a helpful overview and reminder to small businesses about the importance of classifying IRS 1099 vs W-2 workers. This overview provides updates to the employee vs. independent contractor designation, which can be thought of in terms of IRS 1099 vs W-2 designation. Employers are required to engage in an examination of the relationship between businesses and their workers.
The IRS provides employers with common law rules that help determine levels of employee control and independence. Employers should use behavioral and financial considerations, as well as interpreting the type of relationship, to determine worker classification.
Behavioral
How much control does the employer have over the worker’s working time?
- Type and degree of instruction, including when and where to work, and depth of detail in provided instruction
- Evaluation systems that measure how the work is completed (employee), or that measure the end product (independent contractor)
- Level of training provided by the business
The less behavioral control a business exercises over the worker, the more likely that worker is an independent contractor. More behavioral control usually means the worker is an employee.
Financial
How much control does the employer have over the financial part of the worker’s job?
- Financial investment in equipment used by the worker
- Chance for worker loss or profit, as well as whether the worker’s services are available to the market
- Method and regularity of payment
If the business invests in a worker’s equipment, restricts worker’s access to the market, and provides regular pay periods, then that worker is likely an employee. If the business does not invest financial control over the worker, then that worker is likely an independent contractor.
Type of relationship
How do the employer and worker understand their relationship to one another?
- Contracts create professional parameters
- Benefits provided by the business
- Expectations of long-term or short-term working relationships
- Relevancy of services to the business
An employer might provide a worker with a written contract, indefinite employment, and employee benefits like insurance, pension, or vacation and sick pay. In this case, that worker is likely an employee. A worker with a short-term contract and no offered benefits is likely an independent contractor.
If an employer cannot determine whether a worker has IRS 1099 vs W-2 status, then they can fill out Form SS-8. This form, as stated by the IRS, is a Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. The employer or the worker can fill out this form, which is then reviewed by the IRS. Status determination can take at least six months.
Misclassification of a worker can result in a host of legal fees and repercussions. Employers should use every resource available to properly classify each worker, not only to benefit the worker, but to avoid the ramifications of misclassification.
Running a small business is enough of a challenge without the added complication of tax season. Once workers have been appropriately classified as IRS 1099 vs W-2, Advanced Micro Solutions W-2 and 1099 Filer can alleviate tax filing stress.