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Form 1099-MISC:  Payments to Independent Contractors

October 27th, 2014 No comments

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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What do I do with the 1099-MISC if the contractor I hired has moved?

June 6th, 2013 No comments

I hear this question often.  You hired and paid someone $600 or more within a calendar year to do some type of work.  When tax season arrives, you realize that the contractor you hired has moved.  Now what?

You, as the payer, have to do something.  Here are a few things you can do:

  1. Call the contractor and try to get their new mailing address. You don’t have to mail Form 1099-MISC to the recipient.  You can print it out and hand it to them.  Or fax it or email it.  You just want to make sure they get the form and its data.
  2. If you have his or her last known address, then contact the postmaster or local county clerk to see if they have the new address for this contractor.
  3. Send the information return to the last known address that you do have.  If the letter bounces back to you, then you have made an effort.  You can still report the 1099 information to the IRS and the IRS will be able to track the TIN and the amount reported.

Doing nothing is not a good option.  You want to paper or electronically file the data with the IRS.  And make an effort to get Copy B of Form 1099-MISC to the contractor; take notes on the steps that you took and save them.

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1099FIRE is the only company to offer OneTouch E-Filing. Just click a button and the software will automatically log in and upload your file to the IRS FIRE system.  You will receive verification within seconds of receipt of your file.

Filing Information Returns electronically is very cost-effective, is easier than filing on paper, and is more accurate. Filing status is available within 2 business days for Forms 1098, 1099 and W2-G and electronic filers receive a later due date for most returns.

When you file electronically, you are exempt from using pre-printed forms.  You can just print the return in regular paper or email a PDF file to all recipients.

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Who can and who must participate in IRS FIRE

November 2nd, 2009 No comments

The IRS says “any filer of information returns may file their returns electronically”. In the past (2008 and earlier), this was true. What has changed for the 2009 tax season is that you must have a Employer Identification Number (EIN) to apply for a TCC number and not a Social Security Number (SSN). The EIN is a unique nine-digit number used by businesses that operate in the United States. Any business entity (which includes, sole proprietors, corporations, partnerships, non-profit organizations, trusts and estates and government agencies) may apply for the TCC number which lets you then transmit returns electronically, but not individuals via a SSN.

Publication 1220 states on page 6 that “any person, including a corporation, partnership, individual, estate, and trust, who is required to file 250 or more information returns must file such returns electronically”. This 250 requirement applies separately to each type of form that you are required to file.

Lets consider two examples. Say you file 400 Forms 1099-MISC and 50 Forms 1099-A. Then you must file all of the Forms 1099-MISC electronically but you are not required to file Forms 1099-A electronically.

Of the 400 1099-MISC forms that you filed electronically, lets say you need to file 75 corrections. You can file those corrections by paper because the number of corrections for Form 1099-MISC is less than the 250 filing requirement. If you filed 250 or more Forms 1099-MISC corrections, then those must be filed electronically.

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