Many business owners believe by paying workers as independent contractors’s with a year end 1099 they can avoid the hassle of dealing with payroll taxes. The IRS has cracked down on this activity and the business owner could very well end up having to pay all the unpaid payroll tax with penalties and interest. It’s a gamble that could end up being a huge liability. With unpaid payroll tax, the liability carries through the company directly to the owner(s), forever. The business paying for work to be done is responsible for making sure the IRS is getting their share. The business has either to get verification from its independent contractors that they are indeed making their quarterly 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.
Whether to even consider using a 1099 is based on what is going on between the company and the worker. If anyone at the company is even remotely telling the worker; where to be, when to be there, and what to do, and how to do it, the worker is an employee. The IRS has prepared a 20 item list to help businesses determine whether they should be paying by W-2 or 1099. The good folks at Management Recruiters of Salt Lake City have a page that has the list of 20. The IRS 20 Point Checklist For 1099 Workers.