As an employer and owner of a small business, if you have people working for you, then you first need to identify whether they are your employees or are independent contractors. This article deals with the situation where those working for you are independent contractors.
How Do You Decide Whether The Person Is An Employee Or An Independent Contractor?
Generally, the basic tenet used to distinguish between the services of an employee and an independent contractor is by ascertaining whether you as an employer have direct control over the way the person does his job. Or do you have control only over the result of the particular job. In the latter case, the person providing services to you is an independent contractor.
Which Are The Forms Applicable To You?
The first step is to get your independent contractor to fill out the Form W-9 and Request for Taxpayer Identification Number and Certification. You need to keep this form in your records for a period of four years incase any questions relating to the person arises either from the individual himself/herself or the IRS.
On your part, if you have made a payment of more than $600 to an individual for services provided you need to fill out Form 1099-MISC and also provide a copy of it to the independent contractor by January 31, of the year following the payment. A copy of this form also has to be submitted to the IRS by February 28, or March 31, incase the form is filed electronically.
Specific conditions which necessitate filing of Form 1099-MISC are:
• Payments have been made to a person who is not your employee
• Payments were made for services in the normal course of business, including government organizations and non profit organizations.
• Payment was made to an individual, partnership, estate or to a corporation
• Payment of at least $600 was made during the year
Can I Submit A W-2?
If you have both employees and independent contractors working for you, and you are already filling out the W-2 for your employees, you might feel that it will be more convenient for you to use the same form for an independent contractor as well.
Both the W-2 and Form 1099-Misc fall under the ‘information returns’ category. However a W-2 is used to report wages, tips and other compensation to employees, and to report the employee’s income tax and Social Security taxes withheld and any advanced earned income tax credits. It also provides compensation information to the employee, the Internal Revenue Service and the Social Security administration.
If the person working for you is an independent contractor and not an employee, you cannot provide him with a W-2. You will have to fill Form 1099-MISC instead.
In addition to these forms, which relate to compensation paid to independent contractors, you will have to fill out your income tax form, Form 1040 along with the relevant schedules, which is Schedule C, indicating profit or loss from business.
If you have employees, then Forms 941 (Employer’s Quarterly Federal Tax Return), Forms 940 or 940 EZ – for federal unemployment withholding, Forms W-2 and W-3, communication of wage and social security statements and Form 8027 in case your employees receive tips also need to be completed and filed.