1099 – When and How to Use Them
As a business owner, I know the expense there is to hiring an employee. The taxes that are paid on top of all the salary can be very expensive. Then you throw on top of things the cost of Unemployment Insurance and Worker’s Comp and you are wondering why it was you decided you needed employees!
Most businesses have a clear-cut way of determining if they are employees or if they are “independent contractors” and instead of putting them onto payroll you can “1099 them”. First, the basic question – What is a 1099?
A 1099 is the number of a form that is completed each year by a business that used an independent contractor for services and paid more than $600.00 that year for them. This is basically used for you to give them a form stating that you did business with them and paid them OVER the sum of the minimum required for reporting ($600). Think of it as a “W-2 for independent contractors”. Most businesses issue out 1099’s to independent contractors – if you rent, your landlord gets one, if you had snow removal that you paid for they receive a 1099 from you. If you had a garbage service that you had to pay separately for, you issue them one if you paid out more than $600 for the year. For cheer gyms, there will also be 1099 for any choreographers that came in (having paid choreographers I know that unless you got one heck of a deal it costs more than $600), any instructors that came in and ran clinics, classes or camps and was paid more than $600. . . The individuals that you can NOT issue a 1099 to are your coaches! They ARE employees pure and simple.
Each of these is defined by the IRS as follows:
Employee: anyone who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed.
Independent Contractor: 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. The earnings of a person who is working as an independent contractor are subject to Self-Employment Tax.
It is easy to try and reason that coaches you bring into your gym are merely independent contractors,
As a business owner, it is easy to want to avoid paying taxes as often as possible. There are ways that this can happen HONESTLY (speak to your accountant to find out what and how), but you will pay taxes on your business. There is no way around it. Many have tried, and most all have failed, and they all had more expensive CPA’s and attorneys than anyone in the cheer industry can afford.
It is the responsibility for the independent contractor you paid to report the income on their tax forms, but if you give them a 1099 (check with www.irs.gov to find out which 1099 form you are responsible with giving the independent contractor) your business is protected in the event the independent contractor doesn’t report the income.
In the past the idea was that “coaches” in gyms were “independent contractors”, thus not covered under the laws of withholding FICA (Social Security and Medicare), state and federal income taxes, and the gym wasn’t responsible for paying for unemployment insurance (FUTA) or worker’s compensation. The IRS is telling gyms that is NOT the case! As my CPA stated, “If it walks like a duck and quacks like a duck, it’s a duck.” If you are paying them a salary for a job that YOU control the HOURS they perform it, the WAY they perform it, and TO WHOM they perform it, they are employees. The only way you could argue that a coach at the gym was an “independent contractor” would be if they just gave private instruction, set their rate of pay, and controlled their schedule. Team coaches do not fall under this description, so if they are coaching a team at your gym, they are an employee in the eyes of the IRS.
So what happens if the IRS audits your gym and finds that you were 1099-ing individuals that should have been employees? You will pay is the most simple way to put it. You will pay all back taxes – PLUS INTEREST – owed for the employee, fines and penalties, and you will be paying for the attorney and accountant to represent you for this hearing. While the IRS does have a payment plan, the interest rates are very high for this and you have to be approved. They will negotiate, but the entire thing is a huge hassle not to mention it is a black mark on the reputation of your gym. Why deal with it?
The IRS has a great publication that you can download to your computer called Publication 15 (Circular E) Employer’s Tax Guide (http://www.irs.gov/pub/irs-pdf/p15.pdf) which has a lot of answers to the questions that a business owner will need to know when hiring employees and paying them. It has the tax tables that are followed if you do payroll in “long hand” (as in without benefit of Quickbooks or any other business operations program), as well as explaining the operations of per diem, how to pay mileage legally, and how Social Security and Medicare withholdings are done (a total of 12.4% is paid – the employer pays 6.2% and the employee pays 6.2% of each check). It is best to save this publication annually because of all the law changes and tax table adjustments and credits. It typically is changed in January each year, so just keep checking back until you notice the current year is up on the site. If you would rather have paper, you can print off the publication (can run about 130 pages), or you can order one for free from the IRS.
With all of this, even with all of the tools on www.irs.gov, nothing beats having access to an excellent CPA. Accountants know so much and can help out with everything business! They are business owners as well so they completely understand your frustration with paying employees! Find one that you trust and then keep them!! Treat them nicely and they will be very nice to you (I am lucky enough to have one that loves bonuses of lunch once in a while or a nice bottle of wine and goes the extra mile for us in return!). A good accountant is not going to tell you how much money they will save you in taxes, and they will not tell you how they do business with businesses all over the state/nation/world. A good accountant is going to say it like it is, will tell you the good and the bad without holding back, and they will cringe if you figure out a way to save your business money and it is even remotely close to breaking a law (I am envisioning my accountant’s face at times of suggestion of such things. . . and I am giggling)! Most of all, a good accountant will NOT let you 1099 your coaches and save you the hassle and trouble in the end.