IRS Checklist - Employee
The following is a 20-points checklist from the IRS to be used as a guideline in determining whether or not a contractor can legally be paid on a 1099:
(The greater the control exercised over the terms and conditions of employment, the greater the chance that the controlling entity will be held to be the employer. The right to control ((not the act itself)) determines the status as an independent contractor or employee.)
- Must the individual take instructions from your management staff regarding when, where, and how work is to be done?
- Does the individual receive training from your company?
- Is the success or continuation of your business somewhat dependent on the type of service provided by the individual?
- Must the individual personally perform the contracted services?
- Have you hired, supervised, or paid individuals to assist the worker in completing the project stated in the contract?
- Is there a continuing relationship between your company and the individual?
- Must the individual work set hours?
- Is the individual required to work full time at your company?
- Is the work performed on company premises?
- Is the individual required to follow a set sequence or routine in the performance of his work?
- Must the individual give you reports regarding his/her work?
- Is the individual paid by the hour, week, or month?
- Do you reimburse the individual for business/travel expenses?
- Do you supply the individual with needed tools or materials?
- Have you made a significant investment in facilities used by the individual to perform services?
- Is the individual free from suffering a loss or realizing a profit based on his work?
- Does the individual only perform services for your company?
- Does the individual limit the availability of his services to the general public?
- Do you have the right to discharge the individual?
- May the individual terminate his services at any time?
The following are myths about hiring contractors:
- Get the worker to agree he is an independent contractor.
- Prepare a written contract stating the worker is an independent contractor.
- Know about other companies which treat similar workers as independent contractors.
- Can prove that a worker performing many tasks is a true independent contractor in at least one task.
- Do not control the independent contractor's actions.
- Hiring firms aren't liable for independent contractor's actions.
- Hiring firms can save a lot of taxes before the government ever catches them.
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The following are some standard occurrences that may flag your company for an audit: |
- The independent contractor files a claim for unemployment benefits.
- The independent contractor files a claim for workers' compensation.
- The independent contractor files a claim for disability benefits.
- The IRS finds out the independent contractor hasn’t been paying taxes.
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If the IRS rules against my company, what could it cost us?
Back taxes can total:
15.30 % Social Security Tax (on income up to the cap, plus 2.9% of income above that cap)
20.00 % Federal Income Tax
+6.20 % Unemployment Insurance
41.50 % of the contractor's payment
***Auditors can go back three years.
Additional fines can be imposed by the IRS depending on the situation. The basic fines are:
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Violation |
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Potential Fine |
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Failure to file W-2 or 1099 form |
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The minimum fine is $50 for each form that you failed to file. The maximum fine is $250,000 per business or $100,000 for small businesses. |
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Failure to file quarterly return |
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25 percent of the unpaid tax liability. |
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Failure to pay taxes |
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0.5 percent of the unpaid tax liability for each month up to 25 percent. |
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Failure to get Social Security number |
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$50 for each Social Security number you didn't get. |
There are also significant fines if the IRS believes you committed fraud or were negligent, plus fines for many other situations. Contact the IRS if you want further information. In addition, any responsible person (including corporate officers and employees, or members or employees of a partnership) with authority over the financial affairs of the business who willfully fails to collect and pay over taxes may be held personally liable for the total amount of the uncollected tax under the "100 percent" provisions of the Internal Revenue Code (I.R.C). Another point to keep in mind is that the independent contractor who wrongfully benefited as a result of being paid on a 1099 is virtually free from penalties.
Also, if a company classifies workers to avoid paying overtime according to the FLSA, the company can be subject to penalties from the payment of unpaid overtime premiums to liquidated damages, fines of $10,000, and six months imprisonment for willful violations. Unpaid overtime premiums alone may represent substantial monetary liability depending upon the size of the work force and the length of time that the company has failed to pay appropriate overtime. |
Call toll free! 1-877-681-1099 or Email accounting@companykeys.com
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