If you own a business and paid people to work for you last year, you have tax obligations you should be aware of, besides just paying your personal and business taxes. One such obligation is to complete and send out tax forms to all the people who worked for you (and to the IRS).
Which form is required?
That depends upon both tax law and employment law. To figure out which form to use, you must first determine whether the worker in question is an employee or independent contractor. This is an employment-law question.
Employers often label workers as independent contractors. Indeed, this practice has been on the rise because it is less expensive to hire independent contractors than employees. Businesses must pay state and federal unemployment taxes, Social Security and Medicare taxes, and workers' compensation premiums for employees. Independent contractors are not entitled to any of these benefits.
Thus, an employer may enter into an employment contract that indicates the worker is an independent contractor. Is that enough to preclude the worker from claiming to be an employee? Not necessarily. The designation of independent contractor requires more than simply applying that label in a contract.
Just ask FedEx. It is currently in the midst of a large class-action lawsuit brought by drivers in 23 states alleging that they were improperly classified as independent contractors when they should have been considered employees. Although FedEx won the last round and the case is now on appeal, it has prompted FedEx to change its practices to ensure that drivers remain independent contractors.
Often, the question of whether a worker is an employee or independent contractor comes down to the level of control the employer has over what the worker does on the job. Other factors might include whether the worker has a distinct occupation and uses his or her own tools and equipment, and how the worker is paid. (If in doubt, employers can file a form with the IRS, which will review the facts and officially determine a worker's status.)
Employers who misclassify employees as contractors can be held liable for unpaid employment taxes.
Which takes us back to tax law.
Employees must be issued a W-2 form. Independent contractors, on the other hand, receive a 1099 form. These forms must be mailed by Jan. 31 - to the workers and the IRS.
The IRS assesses penalties against employers who don't meet this deadline or don't send them at all. Employers who send forms with missing or incorrect data, or that are illegible, also may get dinged with penalties. The penalty amount may depend upon the size of the business. Also, the later the forms are filed after the deadline, the higher the penalty may be.
Employers can request an extension of the Jan. 31 deadline, but the IRS must receive the request before the date.
If you missed the deadline this year, be prepared to write an additional check to the IRS. Save money next year by making the deadline.
Susan Park, assistant professor of business law at Boise State's College of Business and Economics, firstname.lastname@example.org