There’s been an increased scrutiny of 1099s by most tax and labor agencies (and insurance companies BTW) in recent years. This is happening at federal and state levels. A recurring theme is the agency will want to recharacterize time billed by contracted services as employment. This recharacterization naturally would result in the issuer of the 1099 paying employment taxes.
While the taxing agencies’ methods used to select a company for review are not publicized, there are 3 scenarios where there’s a much higher incidence of examination.
- Former contractor applies for unemployment and/or disability.
- Companies that issue no 1099s, particularly those with higher revenue numbers.
- Companies that issue higher dollar amount 1099s to individuals as opposed to business names including LLCs.
Item 1 and 2 are obvious. In 1, there’s a claim and the state’s department of unemployment will investigate. In 2, it’s unlikely that a company with lots of activity would not have a 1099 filing requirement.
Item 3 is becoming a more prevalent and difficult one to address. Let’s focus on that one in this article. Taxing agencies may hold the position that a recipient is in-fact an employee, even if part-time or occasional. A state agency is currently attempting to recharacterize a licensed contractor, with a logo sided panel van and several commercial accounts, as an employee for one of his accounts. This contractor’s 1099 was made out to him personally and not his LLC. The examiner is pressing the case forward; facts be damned. In the end, will the 1099 issuing taxpayer prevail upon appeal? Most likely, but only after spending thousands on representation.
“A busybody in motion will remain in motion unless proacted upon by….”
What to do?
- Get W-9s prior to paying any vendor. If the vendor tells you they are a Corporation or whatever other reason they don’t need a 1099, they can check the appropriate box in Section 3 of the W-9 which lists every type of tax entity.
- Be careful that you obtain W-9s from vendors that might not go through the Purchase Order process as those frequently get through controls centered around the purchasing process.
- File the 1099s of course.
I have a couple of old (mercifully brief) blog posts about 1099s you can find on my site with more info and recommendations.