Can a Small Business Give an Employee a 1099 Form?
By definition, you can't give an employee an Form 1099 for the work the employee performed. However, you can hire an independent contractor to do work for you, and if that work totals more than $600 over the calendar year, the contractor receives a 1099 from you. You will also have to pay payroll taxes for an employee but not for an independent contractor. The working relationship between you and the person you hire determines whether or not he receives a 1099.
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Employee
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While you hire both employees and independent contractors, you "can control what will be done and how it will be done" if the person is an employee. Under the IRS rules, the fact that you have the right of control over how the services are performed makes a person an employee as determined by common law. A Form 1099 cannot be issued to this type of worker.
Independent Contractor
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Independent contractors follow their own trade and offer their services to the public. The defining factor, according to the IRS is that you have "the right to control or direct only the result of the work and not the means and methods of accomplishing the result." For example, you tell your accountant that you want your taxes completed, but how and when then work is done is left to the accountant, who may also have more than one client. Independent contractors receive form 1099s at the end of the year.
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Statutory Employee
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Some independent contractors are considered employees by statute. In such a situation, the company deducts payroll taxes from any payments to the employee. Statutory employees are: 1) drivers who make pick-ups and deliveries if the driver is a paid a commission by the company; 2) insurance agents who sell primarily for one company; 3) an employee who is supplied materials by a company and returns a product made from those supplies to the company; or 4) a full-time traveling salesperson. Statutory employees don't receive 1099 forms.
Statutory Nonemployees
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Statutory nonemployees are generally either direct sellers or real estate agents. If their income is related to the results of their work, and they work under a contract that says they are independent contractors, then they can be treated as independent contractors. The company that pays statutory nonemployees gives them a form 1099 at the end of the year. For instance, the real estate company that pays the realtor commissions during the year will send the realtor a form 1099.
Miscategorization of Employees
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If you incorrectly classify an employee as an independent contractor with no reasonable basis for doing so, you may be liable for back payroll taxes. The employee can file Form 8919, which will require the employer to pay the business share of the taxes while the employee pays his share. If the employer discovers the mistake, the business may avoid back liability by filing all of the required forms needed for the employee.
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References
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