All factoring companies must be sure their client is properly paying their payroll tax obligations. Often, business owners think paying people as “independent contractors†with a year end 1099 will allow them to avoid the headache of dealing with 941 payroll taxes. The IRS has recently paid much more attention to this activity. The result is the business owner could very well end up having to pay all the unpaid payroll tax with additional penalties & interest. So not properly paying payroll tax is a huge gamble that could end up being a significant liability. Be aware, the unpaid payroll taxes carries through the company directly to the owner(s), forever. Invoice factoring companies go to great length to insure that the 941 payments are current. If the business is doing 1099’s it should either get verification from its independent contractors that they are indeed making their quarterly self employment tax payments or have the independent contractor form their own company whereby it becomes a B2B transaction and both businesses are set up do their own payroll taxes.
What is important here is whether to even consider using a 1099. This is based on what is going on between the company and the worker. If anyone at the company is even remotely telling the worker; what to do, where to be, when to be there – the worker is an employee. The IRS has prepared a form called the SS-8 where you can submit a questionnaire and they will determine for you whether you have an employee or an independent contractor. It would be wise to just read the form to get an idea what they consider an employee who requires 941 withholding and Medicare payments. Better safe than sorry.