Last week, I shared that you have to be smart with how you classify your independent contractors. If the IRS deems your contractors as misclassified (and that they should be classified as employees) you could owe years of back-taxes on their pay.
But – here’s the thing… sometimes you can do EVERYTHING RIGHT. And still get dinged on account of your contractor not truly understanding the relationship.
Here’s how a contractor-misclass can pop-up:
- You hire someone as a contractor. You give them their W9. You work out a contractor agreement with them. You ensure that you’re framing everything independently between the two of you.
- You issue your contractor a 1099 in January.
- Your contractor, not fully understanding, places their 1099 income on the W2 income section of their 1040-EZ tax form. They don’t know the difference between contractor and employee. All they know is that they get a check from you.
The IRS then, in their review of 1040s every April, see a discrepancy between the information the contractor placed on their tax form and the information you (correctly) shared with them. This makes the IRS think: “Hmmm… something’s fishy.” And they begin to dig. And… months later.. you get a letter from the IRS that they want to audit you.
Here’s the thing… you could have done everything right. And, the contractor – not fully understanding what it means to be a contractor – makes this little mistake. (If you have college kids as contractors – I can completely see how this might happen.)
An independent contractor – being an expert in their skillset – should know what it means to be a contractor. They should be IN CONTROL of the work they do for you. If you think your contractor may not understand what it means to be a contractor, there’s a good chance they should be classified as an employee… they don’t really control the work, you likely do.
Need more help knowing what to do? Check out: