Employee or 1099 Independent Contractor?
See the tools, links, video’s and phampets below and to the right to make the determination if you’re a 1099 independent contractor or a w-2 employee. California AB 5 which put into law the decisions of the Dynamex Operations West Inc. v. Superior Court pretty much made everyone an employee w-2.
In general, w-2 employees would be on the Employers DE 9 and can enroll in the Group Health Plan. In general, 1099 independent contractors can’t get on the group health plan. They could enroll in an individual plan and may be able to write it off as a self employed biz owner, Schedule 1 – Schedule C.
In a California Supreme Court ruling, the presumption is that everyone is an employee. The hiring entity can be exempt from treating the person as an employee if they met this three-point test:
1) Is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of the work and in fact; and
2) performs work that is outside the usual course of the hiring entity’s business; and
3) is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
Group Health Insurance Rules
Verify work eligibility
My CPA’s Summary
The bill, which became law on January 1, 2020, codified and expanded a California Supreme Court ruling dictating that virtually anyone working for your company except specifically excluded professions is a W-2 employee. These employees include ever-escalating minimum wages, egregious unemployment and worker compensation costs. The California state government continues to intensify their micromanaging of California businesses. Read more
1099’s are used by federal and state governments as third-party verification of income needed to be recognized by the recipient. Clients ask all the time whether they need to recognize the income if they do not receive a 1099. The answer is Yes. The government just uses the 1099’s to keep you honest There can be severe penalties for not filing required 1099’s. Recently a client was audited by the state of California. Though they did file 1099’s, they did not file all the ones required. The state assessed them over $6,000 (10% of the amount that was to appear on the 1099’s). The federal government also has a penalty.
So here is a primer on the requirements:
The IRS has begun focusing heavily on taxpayer compliance with information reporting laws. Generally any person, including a corporation, partnership, individual, estate, and trust, who makes reportable transactions during the calendar year, must file information returns to report those transactions to the IRS. Persons required to file information returns to the IRS must also furnish statements to the recipients of the income. To properly report the information required on Form 1099, you need to have the provider’s taxpayer identification number (TIN). We suggest you request that the provider fill out and give you a Form W-9, (Request for Taxpayer Identification Number and Certification), before work is done or payments are made. If a provider does not supply you with a taxpayer identification number, you are generally required to “backup withhold” 28 percent from any “reportable payments.” You must file Form 1099-MISC, Miscellaneous Income, for each person to whom you paid during the year: At least $600 in rents, services (including parts and materials), and other income payments. You must report payments on Form 1099-MISC only when the payments are made in the course of your trade or business. Personal payments are not reportable. Some payments are not required to be reported on Form 1099-MISC, although they may be taxable to the recipient.
Payments for which you are not required to file a Form 1099-MISC include:
(1) generally payments to a corporation; (Payments for Attorney Fees must be reported on form 1099 whether or not the attorney is incorporated)
(2) payments for merchandise, telegrams, telephone, freight, storage, and similar items;
(3) wages paid to employees (these must be reported on Form W-2, Wage and Tax Statement);
If you fail to provide Form 1099 and cannot show reasonable cause for the failure, you may be subject to a penalty. The penalty applies if you fail to provide the statement by the deadline, fail to include all information required to be shown on the statement, or include incorrect information on the statement. The penalty is up to $260 per individual 1099 not filed on a timely basis. You may also lose the deduction for the payment if you do not file a timely 1099. If you have any questions about how this affects you or your business, please contact me. Though I do not prepare 1099’s, I can get you someone to do such if you have not already done so. They are now due on January 31st to the government.
How to report 1099 Income for Covered CA MAGI calculations & subsidies
CA EDD DE #38 13 Questions for Determination Revised January 2016 – out of date?
EDD Guide DE 44 see Page 8
Worker’s Compensation Rules – CA Department of Industrial Relations Common Misconceptions
EDD Pamphlet DE 573 m Pre Dynamex Case out of date?
Labor Code 3353
SS8 Form – Determine Worker’s Status for Federal Employement taxes & Income tax withholding
Publication 15 A Employer’s supplemental Tax Guide
IRS SS-8 Worksheet to determine status
Instructions to Complete the 1099 form
My CPA’s warnings about what happens if you don’t file the 1099 properly
Facts that provide evidence of the degree of control and independence fall into three categories:
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
- Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
- Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.
The keys are 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. IRS.gov *
Don’t forget – AB 5 & Dynamex control in CA!
- Who Are Employees?
- Employee or Independent Contractor?
- Employees of Exempt Organizations
- Religious Exemptions and Special Rules for Ministers
- Wages and Other Compensation
- Sick Pay Reporting
- Special Rules for Paying Taxes
CPA Income Tax Tips – W 2 or 1099?
Historical Pre Dynamex Case