W-2`S AND 1099`S SERVICES

Governmental tax reporting seems endless, but BBS can make it a bit easier. BBS can take care of all your 1099 and W-2 compliance and reporting issues. The Internal Revenue Service (IRS) requires all companies that employ workers to file an annual form reporting all wages paid and all taxes withheld for each employee. A Form 1099 is used for those who do work for your business but are not employees and are classified as independent contractors A Form W-2 is used for employees. Generally most workers will get only one of these 2 forms, but sometimes the same worker may receive both.

A worker will be classified as an employee by the IRS unless there is evidence to the contrary. The IRS uses withholding taxes on employees as a major way to enforce collection of taxes. An independent contractor receives all of her or her gross wages and is generally not subject to any tax withholding. The IRS requires independent contractors to meet certain standards to be legally classified as an independent contractor and not as an employee. The three major tests are as follows:

Independent Contractor Test

The IRS will examine the nature and type of control that the employer has over the worker and the relationship between the employer and the worker. A worker whose finances and behavior are basically controlled by the employer will be determined to be an employee. For example, a person who must have his or her duties controlled and supervised by the employer is an employee. A worker who has all of his or her business expenses paid for by the employer will likely be determined to be an employee. The IRS generally requires the existence of a written contract specifying the relationship between the employer and the independent contractor.

Risks and Consequences

The IRS heavily relies on tax withholdings for enforcing tax collections, so if there is any suspicion of and employer wrongly classifying workers as independent contractors, the IRS will perform and audit. A company which files both a W-2 and a 1099 for the same worker will significantly increase the likelihood of such an audit. If the IRS determines that a person was wrongly classified as an independent contractor, it will impose significant tax penalties on both the employee and employer. One way to avoid such negative consequences is for either the employee or the employer to file Form SS-8 (Determination of Worker Status) in advance with the IRS.

Concurrent or Separate

There are two situations in which a worker can receive both Forms W-2 and 1099. The first is if the worker had 2 separate concurrent responsibilities with the employer and thereby performed separate duties, one as an employee and one as an independent contractor. Basically this means the worker had a job as an independent contractor and another job as an employee for the same company at the same time. The second situation is where the worker held these two separate jobs at separate times during the same tax year for the same employer.