1099s - No Need to Fear
I don't write much about my work in this blog, which is perhaps a mistake. Really, the only time you get a sense that I am really busy is when I don't write much, like during January when I am completely overwhelmed with getting everyone's tax forms out. Every now and then I think about starting a business-related blog, but I know I would never keep up with that, either. So, like my somewhat pathetic Pinterest feed which seems to be all about cocktails and kids birthday parties, there's not much here about what I think about what I do — ant what I spend the majority of my time on. Which means, if I'm writing about it now, it must really be on my mind.
I've just spent an especially rocky January arguing with people about 1099 vs. W2 payments (that is, contractors vs. employees). So, based on that, and with hopes of a less rocky future, here are a few thoughts:
1) 1099 is not simply an alternative kind of payment — it's an alternate kind of work. I say this very gently, as someone who thinks that 1099 work can be a great kind of work and should be more prevalent, and who holds 1099 workers close to my heart. But paying by 1099 (vs. as an employee) is not just something that the employer can do because the person is working a few hours a week, or for a short time, or because you feel you can't really set up payroll right now. 1099 workers should be easily able to pass the ABC Test, and should by no means be paid as contractors while people who work alongside them in early identical positions are employees.
2) It's not just the IRS you should worry about. The most likely source of a payroll audit that reveals inappropriate payments is your state WC and UI departments, who conducts more frequent audits, but have as great a penalty power as the IRS.
3) 1099 workers are not always being exploited. The main argument about people not being paid as 1099s is that they are being exploited because the employer is not picking up the social security/medicare match or other benefits (like WC and UI). This can, for sure, be true. But for many people, working as a 1099 can be a strong advantage to them, especially with the new tax laws where W2 employees can no longer deduct most work-related expenses.
4) It may be really easy to reclassify a position so that it is an great fit for a 1099 worker. This may take some work (and trust) by the employer, but could be beneficial for all involved.
5) As an employer, W9s are your BEST friend. As much of a hassle as it may be to try to get a W9 from a person when you are trying to write a check to them, at least then you have leverage, as opposed to trying to reach them to get missing addresses and TINs/SS#s in January (which can be well nigh impossible). If you work with an organization's finances, make it a protocol now that a check simply does not go out without receiving a W9 first (you don't need one for each check, just the first one). Trust me on this one. You'll thank me later.
6) "If in doubt, send it out." While the 1099 issuance limit is the ridiculously low $600, one is supposed to report all income received at tax time. And often there is no way to know definitively if a person needs a 1099 or not, because it's based on their own personal tax structure. So don't worry about sending a 1099 to someone if the amount is below $600, or if they don't need it based on their tax structure. There's no harm and no foul if they get one and don't need it.
7) Yes, per diems are taxable. When you work with a 1099 worker, you are paying them for the job as a whole. This means, by most interpretations of the IRS tea leaves, that the related expenses such as per diems should be included on the 1099 (here it is, straight from the IRS in a ridiculously unofficial looking fact sheet that looks like it should be in comic sans font).
8) Reimbursements might be included on 1099s. This is an area of a lot of confusion, so I'm going to go into a little more detail here. As an employer, you have an option of having an "accountable" plan or not to do so. If you have an "accountable" plan you can indeed reimburse 1099 workers for expenses, as long as they provide detailed records of why that was a business expense (including receipts). The burden is on you, as an employer, to prove that that work was business-related and to retain those receipts for an appropriate time in case of audit or review. If you do NOT have an accountable plan, the 1099 worker simply includes them as part of the job cost. You as the employer bear no responsibility for them, and include them in the reportable 1099 compensation. The 1099 worker can then take them off of their taxes in their Schedule C or corporate tax form (which they cannot do if they are reimbursed). Guess which one of these two plans I recommend?
9) You used to have a grace period between the end of January (when 1099s are due to be sent out) and February or March, when they were due to be filed with the IRS. They are now due to both by January 31. Anyone telling you otherwise is looking old information.
Also insert here a lot of mumbo jumbo about the fact that I am neither your lawyer nor your tax accountant, and you should ensure that this all fits with your personal situation, which may vary. But if I was just able to save you a few minutes or some stress next year, then I'm glad I sat down with the dog and a cup of coffee to write this this foggy morning.
I've just spent an especially rocky January arguing with people about 1099 vs. W2 payments (that is, contractors vs. employees). So, based on that, and with hopes of a less rocky future, here are a few thoughts:
1) 1099 is not simply an alternative kind of payment — it's an alternate kind of work. I say this very gently, as someone who thinks that 1099 work can be a great kind of work and should be more prevalent, and who holds 1099 workers close to my heart. But paying by 1099 (vs. as an employee) is not just something that the employer can do because the person is working a few hours a week, or for a short time, or because you feel you can't really set up payroll right now. 1099 workers should be easily able to pass the ABC Test, and should by no means be paid as contractors while people who work alongside them in early identical positions are employees.
2) It's not just the IRS you should worry about. The most likely source of a payroll audit that reveals inappropriate payments is your state WC and UI departments, who conducts more frequent audits, but have as great a penalty power as the IRS.
3) 1099 workers are not always being exploited. The main argument about people not being paid as 1099s is that they are being exploited because the employer is not picking up the social security/medicare match or other benefits (like WC and UI). This can, for sure, be true. But for many people, working as a 1099 can be a strong advantage to them, especially with the new tax laws where W2 employees can no longer deduct most work-related expenses.
4) It may be really easy to reclassify a position so that it is an great fit for a 1099 worker. This may take some work (and trust) by the employer, but could be beneficial for all involved.
5) As an employer, W9s are your BEST friend. As much of a hassle as it may be to try to get a W9 from a person when you are trying to write a check to them, at least then you have leverage, as opposed to trying to reach them to get missing addresses and TINs/SS#s in January (which can be well nigh impossible). If you work with an organization's finances, make it a protocol now that a check simply does not go out without receiving a W9 first (you don't need one for each check, just the first one). Trust me on this one. You'll thank me later.
6) "If in doubt, send it out." While the 1099 issuance limit is the ridiculously low $600, one is supposed to report all income received at tax time. And often there is no way to know definitively if a person needs a 1099 or not, because it's based on their own personal tax structure. So don't worry about sending a 1099 to someone if the amount is below $600, or if they don't need it based on their tax structure. There's no harm and no foul if they get one and don't need it.
7) Yes, per diems are taxable. When you work with a 1099 worker, you are paying them for the job as a whole. This means, by most interpretations of the IRS tea leaves, that the related expenses such as per diems should be included on the 1099 (here it is, straight from the IRS in a ridiculously unofficial looking fact sheet that looks like it should be in comic sans font).
8) Reimbursements might be included on 1099s. This is an area of a lot of confusion, so I'm going to go into a little more detail here. As an employer, you have an option of having an "accountable" plan or not to do so. If you have an "accountable" plan you can indeed reimburse 1099 workers for expenses, as long as they provide detailed records of why that was a business expense (including receipts). The burden is on you, as an employer, to prove that that work was business-related and to retain those receipts for an appropriate time in case of audit or review. If you do NOT have an accountable plan, the 1099 worker simply includes them as part of the job cost. You as the employer bear no responsibility for them, and include them in the reportable 1099 compensation. The 1099 worker can then take them off of their taxes in their Schedule C or corporate tax form (which they cannot do if they are reimbursed). Guess which one of these two plans I recommend?
9) You used to have a grace period between the end of January (when 1099s are due to be sent out) and February or March, when they were due to be filed with the IRS. They are now due to both by January 31. Anyone telling you otherwise is looking old information.
Also insert here a lot of mumbo jumbo about the fact that I am neither your lawyer nor your tax accountant, and you should ensure that this all fits with your personal situation, which may vary. But if I was just able to save you a few minutes or some stress next year, then I'm glad I sat down with the dog and a cup of coffee to write this this foggy morning.
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