Friday Rant: Be Certain to Vet 1099 Status as a Payer and Recipient

I had the huge pleasure of attending Procurestaff Technologies' Consol Thought Leadership Forum in Manhattan this week. As we all know, a single day 13-hour event must be exceptional or it quickly becomes a tedious distraction from our many other obligations. Hats off to Consol for very carefully sequencing one of the most stimulating forums I've attended. But that's just some background as to how I acquired the following, rather scary information regarding the risks of issuing and receiving the ubiquitous Miscellaneous Income IRS Form 1099

To the uninitiated -- of which I was one before the forum -- the session titled 1099 and Worker Classification Risk: What do Auditors Look For? sounded like a presentation you wouldn't want to attend without a strong second or third cup of coffee. Boy was I mistaken. John McKimmy, Vice President of Compliance at InfoTree Service Inc. who presented with quintessentially calm, CPA style delivery, had everyone's attention.

I cannot hope to do John's important session justice in this column but I will provide some of the sobering highlights. John opened with one of many misconceptions that while organizations that issue 1099s must have a supporting contract in place, that contract alone cannot protect a corporation or LLC from failing an audit. And the problem with failing an audit -- like almost everything when scrutinized by the IRS -- is that it can be astronomically expensive. It is also possible to pre-emptively file an SS-8 application with the IRS to insure that your use of independent contractor / 1099 status is correct, but it takes nine months to find out if your application passes muster.

While not exhaustive, here are a just a few red flag circumstances to run a mile from in an independent contractor relationship:

- Never train an independent contractor
- The payer may not control the manner or sequence by which outcomes are achieved (auditors inspect SOWs, emails and instructions)
- Do not supply tools or supplies to independent contractors

Suffice to say that when classifying an independent contractor, the hiring party may not exercise behavioral or financial control over the independent contractor. Of course the behavioral side is subject to interpretation but liken this to hiring a plumber to fix your bathtub faucet.

So short of not sleeping for three quarters, what should you do? I absolutely recommend using a firm like InfoTree Service Inc. and not blindly trust your accountant or tax preparer to speak for the IRS in this arena. And if you're paid via a 1099 that ultimately fails the IRS's approval, you could be required to re-file years of compensation with accompanying accountant fees and scores of additional tax liability and deduction denials.

With perpetually advancing technology and transactional transparency, the IRS has significantly augmented scrutiny in the independent contractor arena. Whatever you decide to do, don't wait for them to come knocking -- or you may not need coffee for quite some time.

- William Busch

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