Payroll tax filing and payroll obligations are processes with potential for mistakes and missed deadlines. And having independent contractors can complicate them further.
Employee Classification, Independent Contractors and Filing Requirements
The first problem often encountered by employers is proper employee classification.
It is not just a simple matter of calling one worker an 'independent contractor' versus an 'employee' and the issue is becoming increasingly complex and potentially costly for businesses.
Employee classification requires much more than simply assigning a designation to a worker. According the the CalChamber website,
Using a true independent contractor can relieve you of the many burdens placed upon you by California and federal employment laws, but simply calling someone an independent contractor does not make him or her one in the legal sense.
Incorrectly classifying employees as independent contractors is a real risk for many employers. In a recent article at Forbes.com, it was noted that,
This fundamental worker status issue has become one of the most consequential legal determinations around. If you’re in business and guess wrong, the liability for past years can be crushing.
In addition, a recent report by the IRS Inspector General pointed out that many employers are still prone to costly errors when it comes to classifying their workers.
Here are three main points to keep in mind in order to stay compliant if you are filing your own Form 1099-MISC and you have paid independent contractors during the tax year:
Always file a Form 1099-MISC for Independent Contractors
The IRS requires that, when filing payroll taxes, you inform them when you have hired anyone who has received taxable payments from your during the year. This is done by filing an IRS Form 1099-MISC, an information return for advising the IRS and other government agencies. The 1099-MISC serves as one of the main tools for preventing self-employed individuals from under-reporting their taxable income.
In addition, the IRS can also impose penalties on a hiring firm if they intentionally fail to file a Form 1099 when required. However, while you might not fail to do so intentionally, it's not worth the risk of accidentally failing to file for every contractor you paid when doing your payroll tax filing.
Be Clear on Who Actually Needs a Form 1099-MISC
The basic rule, according to the IRS, is that you must file a 1099-MISC for any independent contractor who is a "sole proprietor, or member of a partnership or LLC who has received $600 or more in the year for work done in the course of your trade or business." A trade or business is defined as an activity conducted for gain or profit.
Normally you are not required to file a 100-MISC for payments to a corporation, including a LLC that is treated as a C- or S-Corporation. However, because the rules vary depending on the type of vendor or recipient it is important to understand the IRS instructions.
You are not required to file a 1099-MISC for payments for any non-business related services when completing your payroll tax filing. These might be payments such as those you made to housekeepers, babysitters, dog-walkers, or even home repair services.
Know the Filing Dates for the Form 1099-MISC
Keep in mind that Form 1099-MISC is a multi-part form. It is consists of a Copy A, Copy 1, Copy B, Copy 2, and Copy C. You cannot use a photocopy of the form from the IRS website or PDF version. You must use an original copy, because it is a multi-part form.
These can be easily obtained from the IRS or from your local office supply store.
Each part is sent as follows:
- Copy B and Copy 2 are for the independent contractor and must be provided no later than January 31
- Copy A must be filed with the IRS no later than February 28, or March 31 if you file electronically,
- Copy 1 is for your state taxing authority if your state has a state income tax; the filing deadline for most states is February 28, but some states require earlier filings--check with your state tax department, and
- Copy C is for you to retain in your files.
If you need to, you can request a 30-day extension from the IRS for filing your 1099s by submitting the IRS Form 8809, Extension of Time to File Information Returns. This form must be filed with the IRS by February 28. Note that this is not an automatic extension and you are required to provide an explanation for your request. A letter of explanation from the IRS either approving or denying your request will be sent to you.
Independent Contractors, and Paperless Filing
Many businesses today file their 1099s electronically and, in fact, if you are filing 250 or more information returns, you must file electronically with the IRS. Paperless filing can be done with most accounting software and there are several websites that also offer electronic filing services for 1099s.
Another great option is to use a payroll tax service, such as Accuchex, to file them for you.
Keep in mind, however, that independent contractors must be provided with a paper copy of the 1099-MISC unless they agree to accept an electronic version.
Taxpayers are required to issue and mail out all Form 1099s to their independent contractors by January 31. For the IRS, you have to compile all of your 1099s and submit them with a 1096 by January 31, as well. And, depending on what state you are in, you may also need to file the 1099-MISC with your state franchise agency.
You will also need to file the 1099 if you hire a non-U.S. citizen who performs work inside the United States. In these situations, it is the responsibility of the employer to verify that the worker is not a U.S. citizen, and has performed their work either inside or outside the United States. Because of this requirement, it is beneficial to have any foreign workers fill out and sign a Form W-8BEN.
One more helpful step is to request a Form W-9 from all your vendors before they can get paid. This way you will have their mailing addresses or EINs prior to having to file later.
Payroll Tax Filing Compliance is Essential
It is a priority for businesses to stay informed of the myriad of IRS and other government agency compliance rules and regulations. This is because the potential cost to businesses that fail to meet deadlines, or miss filing certain forms, can be financially devastating, especially for smaller businesses.
Payroll tax filing is a business necessity, but it doesn't need to be a burden.
Considering a reliable payroll management services provider like Accuchex can be an investment that not only can save your company money in staffing and regulatory costs, but can bring you a peace of mind that is priceless!
Get your Free Download: Payroll Outsourcing Guide to help you make an informed decision or call Accuchex Payroll Management Services at 877-422-2824.