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What’s so important about correctly classifying your workers within your business?
In today's episode, Mike talks about the difference between independent contractors and employees. With the government cracking down on worker misclassification, it's more essential than ever for businesses to accurately identify their workers. Misclassifications can lead to hefty penalties, making it imperative for business owners to understand and adhere strictly to payroll guidelines.
Mike stresses the importance of thorough documentation to ensure smooth 1099 NEC filings at year-end. With the filing deadline on January 31st, this episode aims to give you the knowledge and tools needed for accurate tax reporting!
[01:12] Employee or Independent Contractor: What's the Difference?
- It's the employer's duty to determine the correct classification of workers.
- While independent contractors receive their full payment without deductions, employees have tax and other withholdings deducted from their earnings.
- If classified as a 1099 independent contractor, you are responsible for paying taxes on your business profit.
[06:31] How to Determine an Independent Contractor or Employee
- Who controls the work, from specifics to schedules?
- The IRS focuses on behavioral, financial, and type of relationship to classify workers.
- Whether there's an employment or independent contractor agreement in place can be a clear indicator of worker status.
[14:02] Why Is Proper Classification Important?
- Incorrectly classifying a worker can lead to severe financial consequences, including back taxes and penalties.
- Just because another business classifies its workers a certain way doesn’t mean it's correct or suitable for your business.
- For both independent contractors and employees, having clear agreements in place helps define and solidify the working relationship.
[17:28] How to Avoid 1099 Pitfalls: Year-End Filing Best Practices
- It is crucial for businesses to know when and why they need to file a 1099 NEC form.
- Payments totaling $600 or more to an independent contractor within a tax year necessitate this filing.
- Actively collect Form W-9 from all contractors regardless of the payment amount to ensure they have all necessary information on hand for potential future 1099 NEC filings.
- Take note of situations where a 1099 NEC filing is not required
- Start preparing for 1099 NEC filings well before the year-end to ensure a smooth and compliant filing process.
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Key Quotes
"The responsibility of determining an independent contractor or employee comes down to the employer." – Mike Jesowshek, CPA
"If you're classified as a 1099 independent contractor, just know that you're responsible for paying the taxes on any income that you have." – Mike Jesowshek, CPA
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Podcast Host: Mike Jesowshek, CPA - Founder and Host of Small Business Tax Savings Podcast
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Small Business Tax Savings Podcast