It always amazes me that folks are surprised by IRS guidelines on sub-contractors. MOST do not do their homework and others choose to go underground. When it catches up with them it will be costly!
The other item that will catch up with folks is hiring illegals - rules are tightening and while it may take a few years, the ones that are caught will not be very happy.
I'm all for tightening enforcement, since the businesses that are complying to laws are competing on uneven grounds.
Also, the underground folks just do not realize how much they are hurting the economy.
I've posted on this subject several times on several BB's.
Although the test for sub-contractor seems extremely difficult to meet, it's actually fairly straight forward after you understand the concept of a sub-contractor. It was put in place to ensure that taxes are paid.
There are a few other items that were not mentioned, such as:
- The business has burden of proof for a subcontractor relationship.
- The business is required to file 1099 form each year for any subcontractor it paid over $600.
- By not filing the 1099 form, this person or entity is automatically considered an employee for that year.
- If a person was considered an employee the previous year, they can not be considered a subcontractor, if they do the same work.
- Is there a written agreement or contract between the business and the subcontractor.
- How does the business represent the worker to its customers.
I know I missed at least a couple of others so it's best if people read for themselves.
The document at this site:
www.irs.gov/pub/irs-utl/emporind.pdf is a study course for IRS employees on determination of small business Section 530 tax relief qualification. In other words, this is the guide which is used in determining if a business is qualified to NOT pay federal taxes because the individual is considered to be a sub-contractor.
This is a 160 page document with study and precedence cases.