Independent contractors are becoming a hot topic with small businesses and the IRS. The IRS is becoming stricter with its regulations and seems to be focusing on small businesses to stay in compliance and follow these rules. I will give you a quick overview of 1099's/independent contractors.
The most common question that businesses have is who needs to be issued a 1099. The bottom line is that you should ask your CPA. The best way to stay in compliance is to request a W-9 form be filled out by every person or business you pay. This form can be found on the IRS website along with instructions and guidelines for 1099-MISC forms. In general the third box down that says "check appropriate box" will signal if a vendor needs to be issued a 1099. Individual/Sole Proprietors need to be issued a 1099 as well as some types of LLC's. Also, as the IRS guidelines say:
You made the payment to someone who is not your employee;
You made the payment for services in the course of your trade or business (including government agencies and nonprofit organizations);
You made the payment to an individual, partnership, estate, or, in some cases, a corporation; and
You made payments to the payee of at least $600 during the year.
So as you can see even certain types of corporations and partnerships need to be issued a 1099; so again ask your CPA.
Some common mistakes we have seen with 1099's are: typing errors in vendor information, failure to track and issue 1099's and paying people as independent contractors that should be employees. Copy the information directly from the W-9 form that the vendor filled out and verify accuracy. We like for the W-9 forms to be typed so everything is clear. Also, make sure the W-9 is completely filled out (yes a tax classification must be designated for LLC's). Some businesses totally disregard independent contractors and eventually the state will do a payroll audit and hit them with huge penalties. Another place we have seen businesses get hit with violations is in a Workers Comp payroll audit, which is typically an annual procedure. The last mistake is the most common and that is paying people as independent contractors that should be employees. The reason many businesses try and do this is to save on payroll taxes. However, a true independent contractor is becoming less likely due to new regulations. The most common violation is in schedule setting. If you in anyway set an independent contractors schedule in either time or days they are an employee; not an independent contractor. That is if you have a project that needs to be completed on Wednesday from 8 am - 4 pm you cannot pay that person as an independent contractor because you are setting their schedule. However, if you have a project that needs to be completed in the next month and the contractor can do it whenever they please then you can pay them as an independent contractor. That is just one rule though and there are several "tests" the IRS wants a contractor to pass to be paid as an independent contractor and not an employee. You can find some contractor and employee rules on the IRS website here.
Having independent contractors is a hot item right now and can really cost a business if they are found to be in violation. Do your business a favor and document everything and talk with your CPA to ensure that you are staying compliant with the current laws. For information on documenting and tracking 1099's within QuickBooks see our QuickBooks tips blog post on the subject.