Department of Labor and Issuing Forms 1099: Cause for concern

The IRS is referring to the US and NYS Departments of Labor taxpayers who were issued a single Form 1099Misc that was reported on their Form 1040 Schedule C and who had not been issued a Form W-2 and reported no wages on line 7 of their Form 1040.

To summarize the situation in laymen’s terms, the IRS is informing the US and NYS Departments of Labor which individuals earned all their income from one company as an independent contractor to look into whether they should be reclassified as an employee.  Receiving as single Form 1099 and having no other source of earned income is a strong indication that the worker maybe an employee and not an independent contractor.

The department of labor will be using this information to determine which companies they need to audit. If your company is audited and they determine that the workers should be reclassified as employees, as an owner of your company you will be personally liable for the payroll taxes due plus penalties and interest.

Please be aware that there are many factors that determine whether or not a payee who has performed work for a company should be classified as an independent contractor (IC) versus an employee. The most important factor is a written contract between a business and a contractor. If you do not have a contract you will have a very difficult time defending your practices in an audit.

In order to determine how you should proceed it is our recommendation that a law firm that specializes in labor law be retained to perform a “self-audit”. As part of a self-audit, they will review your company’s contract with your IC’s and the actual procedures that are followed. For many firms the conditions set in an IC’s contract and what actually occurs are quite different. If that is the case you stand a great chance of losing if and when the Department of Labor audits you.