Williams Adley, CA Blog

Does the 1099 Really Matter?

by Robert Griffin, CPA and Partner at Williams Adley


1099s are playing an ever increasing role in the compliance policies of both the Internal Revenue Service and Franchise Tax Board. Given a tough economy and declines in tax revenues, both agencies are scrutinizing issuers of 1099's more closely.

Both the IRS and FTB maintain programs to step up enforcement against employers who misclassify employees as independent contractors. The IRS's Voluntary Classification Settlement Program is a new program that allows taxpayers to reclassify workers on a go forward basis while providing partial relief on any old tax amounts due. Effective January 1, 2012, California Senate Bill 459 (SB 459) significantly increases the penalties that can be assessed against employers who willfully misclassify as independent contractors individuals who should be treated as employees.

Before you can determine how to treat the payments that you make, you must determine the business relationship between you and the person performing the service. The individual performing the service may be:

  • an independent contractor
  • an employee
  • a statutory employee
  • a statutory non-employee

Several tests are used to evaluate and properly classify a worker as an employee or contractor. In summary, three key questions to ask include:

  1. Does the company have the right to control how the worker performs his or her duties, and does the company have the right to control what those duties are?
  2. Are the business aspects of the worker controlled by the company? Are tools, equipment and supplies provided? Are expenses reimbursed?
  3. Are written contracts utilized, or are employee type benefits provided?

If you have questions as either a payer or payee, you can complete Form SS-8 and submit it to the IRS for a determination. Beware -- as anyone who has ever called the IRS or FTB knows, it takes a while to get an answer. In this case, it could take up to six months.

If you misclassify an employee as an independent contractor and you have no reasonable basis for doing so, you may be held liable for employment taxes as well as penalties and interest. Misclassified workers can file Social Security Form 8919 - Uncollected Social Security and Medicare Taxes on Wages to report the employee's share of Social Security and Medicare taxes due.

We strongly encourage you to consult with legal counsel or an accountant experienced in employment practice matters to review your independent contractor relationships, to determine the appropriateness of these classifications, and to assist you if re-classifications are required to mitigate potential legal exposures.

In the meantime, please call our office at (510) 893-8114 should you have any questions or would like to receive more information. You can also visit our website, ca.williamsadley.com.