America’s burgeoning gig economy is changing the paperwork landscape for businesses. CPAs, enrolled agents, finance and accounting pros, accounting and taxation firms, small business owners and law firms dealing with tax issues have had to adjust the due diligence steps required when preparing and reporting 1099 forms in particular for the Internal Revenue Service.
The gig economy—which can include independent contractors, consultants, freelancers and even temps and on-call workers—totals 30 million workers and makes up about one-fifth of the American workforce, reports The Hill. If you expand the definition to include very part-time independent work the figure jumps to 70 million, or 36 percent of the labor force. The bottom line is that there’s a good chance your company or clients need to be familiar with the IRS’s Form 1099.
Classify Your Workers Properly
Classifying workers properly is the bedrock for any company that uses freelancers or independent contractors. It’ll also save you lots of headaches with the IRS. See our recent blog post over on the AudioSolutionz blog—tip #4 here—for more info.
“If workers are your employees, you owe payroll taxes on their wages and taxable benefits,” notes Small Business Trends. “You can’t avoid these taxes by labeling workers as independent contractors if they truly are employees. Doing so can result in serious tax penalties as well as penalties from other federal and state agencies.”
Employers misclassify workers for a variety of reasons, reports Just Works—it could be to avoid overtime pay, workers’ comp, unemployment compensation taxes, or employee benefits—or, in other words, money. But just because an employee signs a document stating that she is a contract employee does not make that legal, and a worker who thinks she’s been misclassified as an independent contractor can file a complaint with her state labor department or with the feds.
How many companies break the rules? About one-third of mid-sized businesses, reports Staffing Industry Analysts.
Classify Improperly? Get Set to Pay (Or Serve)
Just Works estimates there are 3.4 million employees nationwide classified as independent contractors who should be reported as employees. The IRS has a way to make employers regret that. Penalties include:
- $50 for each improper W-2
- 5 percent penalty on withheld income taxes, plus 40 percent of FICA and 100 percent of matching FICA taxes
- 5 percent of the unpaid tax liability
- Criminal fines of up to $1,000 per misclassified worker and up to a year in prison
“The Labor Department rarely loses a misclassification case, so don’t take chances when utilizing this valuable talent pool,” stated TLNT.
Are You Classifying Your Employees Properly?
Tax and bankruptcy attorney Haleh C. Naimi deep-dives into employee classification in her conference for Eli Financial, “Best Practices for Reporting Information Returns to the IRS.” Naimi reviews just what an independent contractor is, ways to classify workers, the purpose of Form 1099-MISC, reporting requirements for Form 5471, and due diligence steps to take when disclosing information to workers on Form 5471.
