D. Employees vs. Contractors. The IRS is cracking down on worker misclassification – cases where a business issues a 1099 to an independent contractor for professional fees, when in fact the substance of the relationship indicate the party should be considered a W-2 employee, thus subjecting payments to tax withholding and employer payroll taxes.
The IRS weighs the degree of independence (versus control) the third party maintains in performing the service. Some factors may swing either way and there is no individual factor or set number of factors that are determinative.
You are most likely an independent contractor if you work freely and without supervision, set your own schedule, provide your own equipment, pay your own business expenses and are free to market your services to others.
The key is to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination. If you have a reasonable basis, in certain situations, not to treat your worker as an employee, you may be relieved from having to pay penalties on failing to pay employment taxes.
Form 1099 should be issued to independent contractors providing at least $600 in services by January 31 of the subsequent calendar year. Generally, tax withholding is not required, unless you do not have the payee’s correct taxpayer identification number.
A new penalty regime exists for failure to timely file an accurate Form 1099.