Differentiating Between a 1099 Contractor and an Employee in New York State

Differentiating Between a 1099 Contractor and an Employee
Paying individuals as 1099 Contractors rather than employees is most commonly due to employers misunderstanding the difference between the two. Both the New York State Department of Labor (“NYSDOL”) and the Internal Revenue Service offer specific guidelines for qualifying a worker as a 1099 Contractor. 

Many employers hire individuals for part-time work or internships and believe that qualifies the individual as a 1099 Contractor, allowing the employer to avoid many employment responsibilities by issuing a Form 1099-MISC at the end of the year. Such responsibilities include the employer portion of FICA taxes, Federal and State Unemployment Insurance, Workers Compensation Insurance, withholding and payment of employee/employer taxes, payroll service fees, and Federal/Local employment regulations.

If it all sounds too good to be true, it’s because it is. Improperly treating an employee as a 1099 Contractor, will subject you to not only civil penalties (up to $2,500 per employee for your first offense and up to $5,000 per employee for subsequent offenses) but also criminal penalties (up to 30 days in jail for first your offense and up to 60 days in jail for subsequent offenses) governed by the NYSDOL. In addition the IRS will also impose an increased FICA tax rate and accrue penalties and interest for any underpaid Federal employment taxes. Federal employment taxes include withholding taxes (grossed up from the net amount you paid the employee.)

In order to avoid the aforementioned situation, you need to understand that the employer-employee relationship is based on “control”. The next time you are paying an individual, ask yourself the following questions before making the 1099 Contractor or Employee decision:

·          Do you control the place of attendance?
·          Do you control the pay rate?
·          Do you control the work schedule?
·          Do you provide tools & supplies?
·          Do you supervise the services?

If you answer YES to any of the above questions, the individual you just hired DOES NOT qualify as a 1099 Contractor!

Authors:
Steven Lee - Senior Account Representative
Jason Cohen - CEO

For a detailed explanation, consult with the following links:

NYSDOL - http://www.labor.state.ny.us/ui/dande/ic.shtm; http://www.labor.ny.gov/workerprotection/publicwork/PDFs/FairPlayActE.pdf
 
IRS - http://www.irs.gov/businesses/small/article/0,,id=99921,00.html; http://www.law.cornell.edu/uscode/26/usc_sec_26_00003509----000-.html
 
For more information on how Organized Momentum can help you with all of your Accounting, Bookkeeping, and Payroll needs please email info@omnyc.com or call us @ 212.343.9343