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Business Owners: Avoid Tax Compliance Hang-ups Related to Independent Contractors

Author: James F. McDonough

Date: February 6, 2013

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Avoid Tax Compliance Issues

There are a number of perks to hiring independent contractors for jobs, rather than relying on salaried employees. However, there can also be potential tax law missteps related to issuing forms to freelance workers, making it important for business owners to tread cautiously around filing season. Failing to comply with federal tax guidelines could result in penalties, audits and damage to a company’s reputation, all of which can be costly for small business employers.

To avoid drawing the ire of the Internal Revenue Service, it’s important that company owners not only issue 1099 forms to both independent contractors as well as non-corporate service providers. This means that businesses that paid at least $600 for services during 2012 to any service provider, be it a sole proprietor or partnership, must issue Form 1099-MISC to these entities no later than January 31, 2013. One source of contention that can cause confusion and lead to potential tax law issues is a stipulation regarding corporations. Business owners are not required to provide Form 1099-MISC to corporations. However, owners are required to provide this form to attorneys or medical service providers who do business as corporations, the American Accounts Payable Association elucidates.

Another common scenario that can be harmful to small business owners is failing to issue tax documents in a timely manner. The AAPA reminds that business owners sending Forms 1099-MISC to the IRS by mail should do so no later then February 28. Companies that relay these documents electronically will need to submit them by April 2.

Lastly, business owners should err on the side of caution when sending out documentation. Complying with evolving tax laws can be confusing for many owners, and it may be a positive idea for them to work with a professional to better understand their obligations. However, if owners are confused about whether they should send out Form 1099, it may be a smart idea to send one out, as failing to do so may result in penalties in certain scenarios.

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