Let’s start here. There is no such thing as a 1099 employee. People who work for your construction business are either employees or independent contractors.
There are a plethora of IRS forms 1099. This article will focus solely on 1099-NEC because it is the most common form used in the construction industry.
1099-NEC and Cats or Dogs
One way to explain the difference is to think about cats or dogs. While they look similar in many ways, and either animal can be brought into our homes as pets, they each have different characteristics. Further, if you take your cat to the vet and declare that she is a canine (or your dog and declare he is a feline,) your vet won’t be fooled, and she will not treat them per your declaration but instead as what they are.
Dogs are pack animals that enjoy companionship and working together. Cats are more independent and solitary hunters.
Dogs can be omnivores, while cats are strictly carnivores. (A cat must ingest meat products, but a dog can survive without meat.)
Cats meow or snarl, and dogs bark, howl, or growl.
Dogs thrive on praise; cats not so much.
Cats are more low maintenance than dogs, but dogs are more likely to be protectors and guardians.
Don’t try to call a cat a dog or vice versa.
1099-NEC and Employee or Independent Contractor
While employees and independent contractors look similar in many ways, and either person can be brought into your business as a worker, they each have different characteristics. Further, if you take your employee to the IRS and declare that she is a subcontractor (or your independent contractor and declare he is a staff member,) the IRS isn’t likely to be fooled. The IRS will not treat them per your declaration but instead as what they deem them.
At the beginning of a working relationship, an employee fills out IRS form W-4 (Employee’s Withholding Certificate) and submits it to their employer. In contrast, an independent contractor fills out IRS form W-9 (Request for Taxpayer Identification Number and Certification) and gives it to the person or organization for whom they will provide labor.
Employees earn either an hourly rate or a salary. An independent contractor depends on a contractual agreement that can be an hourly, daily, or weekly amount that ends on a specific date or a total amount to be paid when the job is completed.
Independent Contractors are paid after submitting an invoice on completion or by periodic amounts, whereas employees must receive paychecks on a regularly established pay period.
Independent contractors receive IRS form 1099-NEC from the person or organization they provided labor. On the other hand, an employee gets an IRS form W-2 from their employer. Both forms are tax reporting documents and are also presented to the IRS.
Don’t try to call an employee an independent contractor or vice versa.
1099-NEC and What the IRS Says
This is what the IRS says about determining if a person is an independent contractor or an employee.
“Whether a worker is an independent contractor, or an employee depends on the relationship between the worker and the business. Generally, there are three categories to consider.”
Behavioral control − Does the company control or have the right to control what the worker does and how the worker does the job?
Financial control − Does the business direct or control the financial and business aspects of the worker’s job. Are the business aspects of the worker’s job controlled by the payer? Things like how the worker is paid, are expenses reimbursed, who provides tools/supplies, etc.
Relationship of the parties − Are there written contracts or employee type benefits such as pension plan, insurance, vacation pay? Will the relationship continue and is the work performed a key aspect of the business?”
The IRS adds one final note to their information concerning determining a worker’s status: “Finally, document each of the factors used in coming up with the determination.”
1099-NEC the Bottom Line
The “NEC” in 1099-NEC stands for “non-employee compensation.” That helps make it clear how the form is to be used.
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