Hiring Help? 5 Questions to Ask Before You Issue a 1099
You hired help. Now what do you call them?
Maybe you brought on a bookkeeper, a part-time assistant, or extra hands for a busy season. Sooner or later, a simple question comes up: do you pay this person as a contractor on a 1099 or as an employee on a W-2?
It feels like a paperwork choice, but it affects taxes, insurance, and how the working relationship is set up. It is much easier to get right at the start than to untangle later.
Five questions to ask before you decide
Who decides how the work gets done? If you set the hours, give step-by-step instructions, or train the person your way, that points toward an employee. A contractor usually controls the method while you agree on the result.
Who runs the business side? Contractors tend to use their own tools, quote or invoice by the job, and can make or lose money on the work. Employees are paid for their time.
What does the relationship look like? Ongoing, open-ended work, especially with perks like insurance or paid time off, looks like employment. A defined project with an end date looks like contracting.
Does this person work for other people too? A true contractor often has other clients and is free to look for new business.
Does your paperwork match reality? A signed contractor agreement helps, but it does not settle the question on its own. How the work actually happens is what counts.
The IRS groups these ideas into behavioral control, financial control, and the type of relationship. You can read its overview on IRS Topic 762.
Where people get tripped up
Choosing the label first. Calling someone a contractor because it seems simpler is a common starting point, and it can leave you exposed if the facts say otherwise.
Treating day-to-day direction as hands-off. If you are managing someone closely, a contractor label may not fit.
Assuming every agency uses the same test. The IRS is one test, and your state may use another. Tennessee, for example, uses a three-part test for unemployment insurance.
Waiting for a problem. Questions often come up after a worker files for unemployment benefits, when it is harder to fix things calmly.
Not sure? Here is what you can do
Talk it through with your CPA before year end. A short conversation now can save a lot of cleanup later.
Ask the IRS about a specific worker. If you want an official answer, the IRS offers Form SS-8 for that purpose.
If you think you have been classifying someone incorrectly, you have options. The IRS has programs designed to help businesses correct course, so talk with a professional before making changes.
A simple year-end habit
Before the year closes, list everyone you paid for services, note how you have classified each person, and write down why. Having that list in hand makes tax time smoother and gives you a clear starting point for any questions.
Talk with Denise Stubbs CPA
Every working relationship is a little different. If you are unsure how to classify the people who work for your business, contact Denise Stubbs CPA at (828) 570-5760, or visit www.DeniseStubbsCPA.com. Because classification can also involve employment law, we may suggest you speak with an employment attorney as well.
This blog post is provided for educational purposes only and does not constitute personalized financial, tax, or investment advice. Tax laws are complex, change frequently, and vary based on individual circumstances. Before implementing any strategies discussed, please consult with qualified financial advisors, tax professionals, or CPAs who can assess your specific situation. This content should not be relied upon as a substitute for professional consultation.
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