There is a myth about IRS Form 1099. It is a creation myth of sorts that fools otherwise honest, hardworking business people into believing that they have no employees. The myth is that if you pay a worker without withholding employment taxes and report payments with IRS Form 1099, the worker is an independent contractor. It’s not true – even if the worker is in full agreement with the payment arrangement.
There is a myth about IRS Form 1099. It is a creation myth of sorts that fools otherwise honest, hardworking business people into believing that they have no employees. The myth is that if you pay a worker without withholding employment taxes and report payments with IRS Form 1099, the worker is an independent contractor. It’s not true – even if the worker is in full agreement with the payment arrangement.
IRS Form 1099 is the correct form to use to report payments to independent contractors. But the form itself does not create an independent contractor relationship. If asked to determine whether a person is an employee or an independent contractor, the IRS considers multiple factors.
The problems created by reliance on the 1099 myth usually come to our attention when a person previously thought to be an independent contractor makes a claim for unemployment or workers’ compensation benefits. Such claims trigger investigations by the Labor Department and Workers’ Compensation Board and ruinous penalties if no insurance is found.
The Worker’s Compensation Board applies a 10 point test to determine if a worker is an independent contractor in most industries. In the construction industry, a worker is presumed to be an employee unless a 12 point test of independent contractor status is met. These tests are difficult to pass. Especially if the accused employer didn’t know they exist and, therefore, didn’t plan for them.
Contact us for more information on how to create an independent contractor relationship or what to do about uninsured claims and penalties.
