Properly Classifying Employees and Independent Contractors

Some businesses misclassify an estimated 10 percent to 60 percent of their workers as independent contractors, and nearly 30 percent of firms misclassify contractors. It may be tempting to classify an employee as an independent contractor because of the cost savings, but don’t do it! There are strict rules surrounding the proper classification of a worker and steep penalties for failure to apply the law properly.

If you answer “yes” to any of the following questions, you’re likely hiring a W-2 employee and not a 1099 independent contractor:

• Will the work be performed on company premises?
• Will the individual work only for you?
• Will you provide tools and training for your worker?
• Do you control the hours the person works?

Use this infographic to help you distinguish between the two.

Form 1099-MISC is required if you’ve paid $600 or more for services performed for your business by people not treated as your employees. Those payments can include fees to subcontractors, attorneys or accountants. The form must be sent to recipients by January 31 and to the IRS by Feb. 28, or March 31 if filing electronically. There are convenient electronic services, such as Intuit’s® 1099 e-file, that pre-fill your information and enable you to email or print forms for your contractors so that you don’t have to run to the office supply store to buy them.

You must file the Form W-2 Wage and Tax Statement to report payments to your employees, such as wages, tips and other compensation. The form must be sent to employees by Jan. 31, and to the Social Security Administration (along with Form W-3) by Feb. 28, or March 31 if filing electronically.