Can someone explain to me how a 1099 works?

Question

I am beginning a new business with some partners where our employees will have a 1099. Can someone explain this in layman's terms so I can get a better generalization of this. Websites? Thanks all!

Answer 1

If you will have employees, forget about 1099s. They are NOT the way that you will account for the monies paid to your employees.

The people performing services for you are classified as employees if you provide the place and tools to perform their jobs, set work rules, determine who works and when they work, etc.

People who perform services such as painting the place, laying new carpet, repairing the computers and office machines, mow the lawns, the plumber who unclogs a drain or the electrician who installs new outlets and light fixtures, etc. may be classified as contractors if they do not regularly work solely for you, provide their own tools and have final say on when the work is actually done.

People who report to your business location on a set schedule, are subject to work rules such as time and attendance and personal appearance, generally work only for you and use your tools and equipment including office machines, etc. are employees and MUST be paid as such. You must withhold taxes from their pay and pay your payroll taxes. You do NOT get a choice in this matter!

Companies that mis-classify employees as contractors are engaging in payroll tax fraud AND are in violation of a number of labor laws. This type of abuse has been getting more attention from the IRS and state labor boards and a number of businesses have been bankrupted by the tax levies when the IRS steps in. The business principals -- YOU in this case -- can and will be held personally liable for the unpaid taxes. This is a rising item on the IRS' "fraud barometer" and in my opinion will be getting MUCH more attention going forward.

Do the right thing. Engage the services of a competent tax advisor and an attorney to make sure you're doing things legally. Your financial health and possibly your personal freedom are at stake if you do not. The mere fact that you are asking this question tells me you are generally clueless on the law and the legal issues involved. Get proper legal advice and PLAY BY THE RULES. You WILL eventually regret it if you do not.

Answer 2

You have a problem already. An employee doesn't get a 1099 - that's only for independent contractors. You can't just decide to call them contractors, even if they agree - what they do for you, and the terms of their doing it, determines which they are. See http://www.irs.gov/businesses/small/article/0,,id=99921,00.html - basically if you just give them a project and a general outline of how it's to be done, and agree on a due date, they'd be contractors, but if you control for example where they work and the hours that they work, they are employees and you have to treat them as such, withholding taxes and paying the employer taxes, and give them a W-2 not a 1099 at the end of the year.

You'd be ahead to see a CPA to sort out exactly what you need to do before you get yourselves into hot water with the IRS.

Answer 3

Please go read the form SS-8 (irs.gov)--it discusses the difference between an employee and independent contractor. This is a facts and circumstances issue, not a payer's choice.

Employees get a W-2. The employer withhold 7.65% of their pay, matches this amount and files 940/941 and FUTA returns. The employer *also* ensures that federal and state income tax is withheld based on the W-4 form. As the employer, you must verify that the individual is eligible to work by getting their SSN before they start work.

Independent contractors just get a check. No money is withheld or matched. You must also got their SSN (if the work is done in the US or by a US person) so that you can report the payments to the IRS on the 1099-Misc form.