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Form 1099-MISC:  Payments to Independent Contractors

One of the most frequent uses of Form 1099-MISC is to report payments for services to non-employees or independent contractors.  Those payments are listed in box 7 of the 1099-MISC for annual amounts of $600 or more.  It is the payer who makes this determination of the work relationship, and there are tests the IRS uses to classify employees vs. independent contractor.  The most important of these is that the IRS presumes that work performed is part of an employee relationship, and the payer may have to demonstrate why they are treating the worker as an independent contractor.

Employee vs. Independent Contractor Relationships

According to the IRS instructions for 1099-MISC, the basic tests used to define the employee relationship center around behavioral control, financial control and relationship of the parties.  Behavioral control means that a worker receives extensive instructions on how to perform the work, as well as specific training.  Financial control is determined by the worker’s own investment in the work, and the potential to realize a profit or loss.  In other words, if their services are part of a broader work scheme that they own and operate, then they may be contractors and not employees.  Finally, the relationship between the parties may be ultimately determined by the nature of the contract that is used, and evidence of control and employee status contained in the contract terms.

The Process of Determining Status

Form SS-8 is used by workers who request to have their work status determined by the IRS, if the worker feels that they are actually in an employment relationship.  Some workers may feel unfairly excluded from the employee status, and the benefits that go along with it.  The form has many questions that pertain to the issues of control and the nature of the work relationship, and as mentioned the business has to overcome the presumption that the worker is an employee.

The advantage for a business in paying independent contractors is that they can avoid paying the employer portion of Medicaid and social security for the worker.  If the worker is self-employed, they pay the entire amount as self-employment tax.  Also, independent contractors are not entitled to any benefits such as health or disability insurance, so a business can realize savings in this area as well.

However the IRS does scrutinize this relationship and will make a determination either on its own as part of an audit or at the request of the worker.  Any business that claims workers are independent contractors would be well served to have a personal services contract that clearly defines the relationship.

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Erich J. Ruth

Erich J. Ruth provides technical support for National Software which is the parent company for 1099FIRE. 1099FIRE develops and markets a comprehensive range of products that enables any size of business or institution to effectively manage and comply with year-end filing requirements. 1099FIRE is an employee-owned company located in Phoenix, Arizona.

If you have any questions or comments about our software, feel free to contact us at any time.

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