How do you determine if a worker is an employee or an independent contractor?

The determination can be complex and depends on the facts and circumstances of each case. The determination is based on whether the person for whom the services are performed has the right to control how the worker performs the services. It’s not based merely on how the worker is paid, how often the worker is paid, or whether the work is part-time or full-time.

There are three basic categories of factors that are relevant to determining a worker’s classification:

  • Behavioral control (whether there’s a right to direct or control how the worker does the work),
  • Financial control (whether there’s a right to direct or control the business part of the work), and
  • Relationship of the parties (how the business and worker perceive the relationship).

For more information on employer-employee relationships, refer to Publication 15, (Circular E), Employer’s Tax Guide and Publication 15-A, Employer’s Supplemental Tax Guide. Also, refer to Publication 1779, Independent Contractor or Employee.

If you would like the IRS to determine whether services are performed as an employee or independent contractor, you may submit Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.

Are payments made to a corporation reportable on a 1099-MISC and 1099-NEC form?

Generally, payments to a corporation (including a limited liability company (LLC) that is treated as a C or S corporation) are not reportable.  However, the following payments made to corporations generally must be reported on Form 1099-MISC.

    • Medical and health care payments reported in box 6, 1099-MISC.
    • Fish purchases for cash reported in box 1, 1099-NEC.
    • Attorneys’ fees reported in box 1, 1099-NEC.
    • Gross proceeds paid to an attorney reported in box 10, 1099-MISC.
    • Substitute payments in lieu of dividends or tax-exempt interest reported in box 8, 1099-MISC.
    • Payments by a federal executive agency for services (vendors) reported in box 1, 1099-NEC.

For additional information see the Instructions for Forms 1099-MISC and 1099-NEC.

Are payments made to a tax-exempt organization reportable on a 1099-MISC or 1099-NEC form?

Payments to a tax-exempt organization including tax-exempt trusts (IRAs, HSAs, Archer MSAs, Coverdell ESAs, and ABLE (529A) accounts), the United States, a state, the District of Columbia, a U.S. possession, or a foreign government are not reportable on a 1099-MISC or 1099-NEC form.  A helpful IRS website, Tax Exempt Organization Search, helps users find information about a tax-exempt organization’s federal tax status and filings.  (https://www.irs.gov/charities-non-profits/tax-exempt-organization-search)

For additional information see the Instructions for Form 1099-MISC and 1099-NEC.

Are transit passes and parking for independent contractors reportable on a 1099-MISC form?

Although you cannot provide qualified transportation fringes to independent contractors, the working condition and de minimis fringe rules for transit passes and parking apply to independent contractors. Tokens or farecards that enable an independent contractor to commute on a public transit system (not including privately operated van pools) are excludable from the independent contractor’s gross income and are not reportable on Form 1099-MISC if their value in any month is $21 or less. However, if the value of a pass provided in a month is greater than $21, the full value is part of the gross income and must be reported on Form 1099-MISC (Box 7). The value of parking may be excludable from an independent contractor’s gross income, and, therefore, not reportable on Form 1099-MISC if certain requirements are met. See Regulations section 1.132-9(b), Q/A-24.

For additional information see the 2019 Instructions for Form 1099-MISC