Have You Classified Your Employees and Independent Contractors Correctly?

The key to classification depends on the control the business has over the employee/independent contractor. How much control do you have over them? Do you tell them where, when and how to work? Do you provide the tools for them to perform their job? If you answered yes to the latter two questions, then they are most likely considered an employee and taxes are withheld from their wages.

An independent contractor is someone independent of the business. They are free to seek out other jobs, and also choose when and how they work. The business usually does not need to provide significant instructions and training to an independent contractor. Taxes, including Federal Withholding, are usually not withheld from contractor payments.

It is important to identify the correct classification because misapplying a worker as an independent contractor and not an employee could make the business liable for employment taxes.

How Do I Report Employee Wages or Contractor Payments to the IRS?

Businesses have tax filing obligations for reporting wages and contractor payments to the IRS and the Social Security Administration. Employees are issued a Form W-2 and contractors and other non-employees are issued a Form 1099-MISC.  In addition to these forms, a Form W-3 or Form 1096 must accompany the respective forms to summarize the total wages/non-employee compensation reported on the W-2’s and 1099’s filed.

Copies of Form W-2 must be furnished to employees and filed with the Social Security Administration by January 31, 2020. Also, copies of Form 1099-MISC need to be distributed to independent contractors and filed with the Internal Revenue Service by January 31, 2020. This early filing date has been set to try to better detect identity fraud by being able to verify a taxpayer’s income reported on these forms.

Author: Nicole DeFeo
Patrick M. Burns, CPA, PA

About the Author
Nicole DeFeo is a Certified Public Accountant with the Patrick M. Burns, CPA, PA accounting firm in Orlando, FL. She has 15 years of experience in public accounting.