Contractor vs. Employee

IRS Definition:

The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. 

States like CA Definition:

The ABC Test (California) defines a worker as an employee and not an independent contractor UNLESS the hiring entity satisfies ALL 3 of the following conditions:

• The Worker is free from control & direction of the hiring entity in connection with the performance of the work both under the contract and in fact;
• The Worker performs work that is outside the usual course of the hiring entities business; and
• The workers are customarily engaged in an independently established trade, occupation, or business of the SAME nature that involves the work performed.

Bottom line, your State may have a more restrictive definition of what a independent contractor is defined as and the IRS will conform to the State definition.

Collect W-9 

Once you’ve established that you have a legitimate contractor and your worker is NOT an employee, the next step is to provide to them a W-9 form and collect this for your records.

The W-9 can be found on the IRS website (www.IRS.gov) by simply searching “W-9” in the search box.

The W-9 collects basic information about the contractor such as:

• Legal name - Business structure (sole proprietorship, LLC, Corporation, etc.)
• Address - Tax Identification Number

Collecting the W-9 is mission critical because it helps you know who and where to issue a 1099 to at year end for tax reporting purposes.

Track Payments To Contractor

Keep a record of:

• Who you pay
• How you pay them 
• How much you pay them

This may seem elementary but if you pay someone cash and want to include that in your 1099 reporting to them you need be keeping records of this. 

Issue that person a receipt, send an email, or provide some sort of proof that you paid them that amount.

Reconcile Payments Before Year End

It’s strongly recommended that you establish a best practice of issuing a summary to all contractors of their January through November payments.

In addition to sending them the summary of payments made it is also a best practice to provide them with a copy of the W-9 that they provided and ask them to verify any information or update their address.

Issue 1099

All that is needed now is in January to update your records with your December payment information.

Using a service such as www.EagleViewFiling.com is an easy way to issue a 1099 to both the recipient and the IRS.