Worker Classification Guidelines for 1099 Compliance

Tips for Complying with IRS 1099 Classification Rules

Although many state and federal agencies exist that have the ability to audit a business and expose worker misclassification, the Internal Revenue Service is one agency that's likely to enforce 1099 compliance requirements if performing an audit on your business.

There are several ways the IRS can determine 1099 classification, and the relationship is usually assessed by a set of rules. If involved in an audit, your business will be examined against a series of regulations regarding your 1099 consultant practices. This will help to determine compliance as an employee or 1099 contractor.

Guidelines to Assist with 1099 Compliance

Discussed at length in Secure Talent’s resources section, the IRS has 1099 classification rules to determine compliance with the law. These requirements are known as the 20 Questions or 3 Factors test, and examine the working relationship between a company and independent contractor, looking at such things as control over work, financial control and more. Some questions you may want to ask yourself when assessing your IC workforce and 1099 compliance are:

• Do they provide services integral to your business?
• Do they perform tasks similar to your employees?
• Do they perform services personally?
• Do they hire/supervise your employees?
• Do they receive training from your company?
• Do they take instruction from you?
• Do they have an ongoing relationship with your company?
• Do they have a prior employee status with your company?
• Do they have the required licenses, permits and insurance?
• Does your business provide the place of work?
• Does your business engage the 1099s full time?
• Does your business require regular reports on activity and time?
• Does your business monitor, approve or control the IC’s expenses?
• Does your business provide the contractor’s main source of revenue?
• Does your business have a true independent contractor employment agreement for services with your 1099 consultants?

Professional 1099 Compliance Programs: The “Dos” and “Don’ts”

Certain guidelines should be adhered to when engaging a worker classified as an independent contractor; this includes IRS 1099 classification rules. Take care to follow special guidelines in day-to-day operations so as not to confuse the worker as an employee versus a 1099. The following are just some rules Secure Talent suggests following in order to support proper employee classification.

The “Dos” of a 1099 Compliance Program

• Do get executive-level buy-in and support for your corporate 1099 compliance program.
• Do create a cross-functional team comprised of individuals from human resources, legal, accounting and purchasing to ensure that there are no loopholes.
• Do standardize a classification process and require supporting documentation to the reduce risk of a 1099 penalty in an audit.
• Do standardize language to describe the 1099 relationship, such as “service provider” or “independent contractor.”
• Do include a clause in the agreement that excludes the 1099 worker from company-sponsored benefits.
• Do communicate the corporate 1099 compliance program with all stakeholders.
• Do require a written “statement of work” for each project the independent contractor works on.
• Do use a nondisclosure agreement and if applicable, an intellectual property release as well.
• Do pay 1099s by the project or milestone, not by the hour.
• Do re-qualify individuals for each new project.
• Do specify project term.
• Do create and maintain comprehensive compliance files in a centralized location.

The “Don’ts” of 1099 Compliance Program

• Don’t define what working hours the 1099 professional is to perform duties.
• Don’t give the independent contractor materials like business cards from your company with his or her name on it.
• Don’t offer job training. Instructions on the desired end-result is OK.
• Don’t provide added benefits such as company-sponsored benefits, invitations to meetings and events or any other perk that employees of the company receive.
• Don’t allow participation in employee functions that would make the classification become more of a gray area.
• Don’t pay travel expenses or reimburse costs incurred by the IC’s business.
• Don’t pay for equipment that 1099 needs to do his or her job or give workspace at the company (unless absolutely required to deliver the service provided).
• Don’t give performance reviews that evaluate the level of work the IC is providing.

Disclaimer: The content in this Web site is designed to provide educational information and should not be considered legal advice.

Secure Talent ensures your business is compliant with IRS 1099 classification rules through a robust compliance program. Contact us today online or call 800.778.0197.