When you run a business, figuring out what tax forms to issue to your employees can be challenging. If you have independent contractors, you may need to issue them 1099 forms at the beginning of the year. In some cases, you do not have to issue 1099's for your independent contractors, depending on how much they earned.
When you have independent contractors working for you, the amount that you pay them in the course of a year determines whether you have to issue 1099 forms. According to the Internal Revenue Service, you must issue a 1099 form if you paid an independent contractor more than $600 in the year. For individuals you paid less than that threshold, you do not have to issue a 1099. However, the independent contractor still has to report the income on his own.
Employee vs Independent Contractor
Some employers think that they should issue a 1099 to their independent contractors, when in reality, they actually have employees. The line between Independent contractors and employees is often blurred. When trying to determine whether your relationship is that of an employer and employee, look at the level of control you have. If you regularly direct and control what they do, they could be employees. If you offer benefits to them such as insurance, pension or profit sharing, they could be employees, as well.
When you examine your relationship with your independent contractors or employees, you must then issue the correct forms. If these individuals are classified as independent contractors, you would issue a 1099-Misc form at the beginning of the next year. If you determine that the individuals are considered employees, you need to issue a W-2 form. With both forms, you must include information such as the individual's Social Security number and the amount you paid him.
If you are unsure whether you should classify someone as an employee or as an independent contractor, consult an accountant. If you make the wrong decision and classify an employee as an independent contractor, the IRS could penalize you. If you have employees, you must pay Social Security and Medicare taxes for them. Failure to do so and to withhold part of their money for taxes could result in penalties for you.