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Don't Mix Up Employee, Contractor Tax Forms

By Tanya Roth, Esq. | Last updated on

It's tax season, and you're sending out your tax forms to all of those people who worked for you in the past year.

One of the big questions many have is, "Which form"? Do you send out a W-2 or a 1099?

Which form, indeed.

That question hinges on a lot more than some tax technicality. In order to answer it, we need to reach into employment law to help determine the answer to the first question: employee or independent contractor?

It sounds easy enough, you say. After all, when you drafted your employment contract from a template you found online, you added a clause that said, "This is an independent contractor arrangement."

That language should limit workers from claiming they're employees, right? Wrong.

It's just not that easy. For employees, an employer is required to withhold taxes, pay Social Security and Medicare taxes, and pay an unemployment tax on the wages.

The same cannot be said for independent contractors.

So you can see the appeal in wanting to treat your workers as independent contractors, right?

Unfortunately, the IRS sees that appeal, too. That's why they say "if it looks like a duck"... Well, you get the idea.

If you have a great degree of control over what the worker does on the job, you may actually have an employee and not an independent contractor. The same might be said if you reimburse the worker for expenses and provide tools for the worker to perform his duties.

Another aspect is how important and critical the worker's job tasks are to your business.

In short, the IRS will look at several factors when deciding if you have an employee or an independent contractor. If you've misclassified the worker as a contractor when the worker is in fact an employee, then you could be held liable for the employment taxes that you failed to pay.

Moving back to the main question, then: Which tax forms should you send out? For an employee, you issue a W-2 form. For an independent contractor, you send out a 1099 form.

For other small business tax-related questions, check out our Small Business Tax Information FAQ.

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