1099 Made Simple, Less Risk

1099 forms

From the Infiniti HR Blog — Mindy Flanigan provides some superb guidance on how to engage with independent contractors.  She provides an easy to understand process and a terrific list of “do’s” and “don’ts”.  She writes:

If you have identified a need to “contract” with a person or entity that will be 1009′d at year end, forget that “20 Point” test let’s embrace some simple steps to follow:

  • Is the need you have identified by all the primary service your company offers? If the core service of your business is computer repair, then you generally would not categorize your technicians as 1099.  If your company provides after hours answering services, then those who answer for the phone for customers should be 1099. To qualify as 1099 without back payroll tax or other liability your business should not rely on a contractor as a major portion of your businesses success.
  • If you have cleared step 1, step two is to find the vendor.  Be referred, do a Google search, put an RFP out. Yes, an RFP. You are looking for a vendor to propose to your business how what they do will satisfy your need and what their terms are.  This is very different from hiring an employee who will be paid through your payroll. If you vet them and want to move forward then follow the step listed below.
  • Enter into a service agreement. Or call it a contract. Initially, the service agreement terms will be proposed by the vendor (1099), and you can decide to sign and accept or negotiate out a few items.  BUT some key points with that service agreement:  Be sure it clearly states the individual or company is a contractor never an employee; highlight the contractor’s autonomy and level of authority in complete a project or rendering services; list circumstances that would cause termination of the agreement; be sure the contractor commits to keeping their licenses and insurances current through the course of the agreement; no exclusivity!  A contractor should be free to work with other “clients”.
  • Require the chosen contractor to prove their existence as a business entity!  Ask for a copy of a current business license and any proof of insurance you deem necessary to feel comfortable.  Typically that would be proof of E&O coverage for certain consultants and proof of workers’ compensation insurance or other similar business insurances you need to be aware to be comfortable outsourcing work to them.
  • If paying the vendor (1099) more than $600 per year, ask them to provide a signed W9.  This will contain their Federal Tax ID number so you can properly process that 1099 at year end, so income earned by that business entity (1099) is correctly reported to the IRS.

Once you begin working with this vendor, some do’s and don’ts:

  • Do NOT set their hours. You tell them what needs to be done and they do it according to their own proposed terms, their schedule and their own staffing decisions.
  • Do NOT evaluate the vendor or providers performance like you would an employee.  If they violate the terms of the agreement or contractor, end it in accordance with the terms you agreed to.
  • DO allow them to use their own tools, their own equipment. They are a professional business entity with their own supplies.
  • Do NOT pay for their benefits or attempt to put them on any of your group benefit plans.
  • Do NOT require them to be at your workplace or attempt to integrate them into your primary operations.
  • DO require a copy of a business license and proof of insurances.
  • If happy with services rendered DO keep renewing an agreement.  Perhaps every couple of years.  An ongoing relationship with a 1099 should never be written or implied.
  • DO treat a 1099 as business owner and NOT an employee….

Read the full story at  1099 Made Simple, Less Risk

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