If you’re at the helm of a startup and hiring, onboarding, and managing (and sometimes choppy)1099s, this blog is for you. Today, let’s talk about a not-so-fun, but super-important topic: 1099 audit triggers 📑🧐.
Understanding 1099s: The Basics
First things first, a 1099 form is what you use to report income paid to a contractor or freelancer. If you’ve paid someone at least $600 for services during the year, you’re typically required to issue a 1099. Simple, right? But here’s where it gets a bit more complicated.
Why the IRS Cares
The IRS loves its paperwork, and they’re particularly interested in making sure everyone reports their income correctly. They’re on the lookout for any signs that a business might be misclassifying employees as independent contractors to avoid paying employment taxes. That’s a big no-no.
Common Audit Triggers
Let’s dive into what might wave a red flag 🚩 at your friendly IRS auditor:
1. Consistency in Reporting: If you’re inconsistent in issuing 1099s (like sending them to some contractors but not others), that’s a red flag.
2. Mismatched Income Reports: If the income reported by your contractors doesn’t match the 1099s you’ve filed, expect the IRS to get curious.
3. High Number of Contractors: If you’re working with a large number of contractors, especially if they’re doing similar work to what employees would do, the IRS might wonder why.
4. Contractors Working Full-Time Hours: If a contractor is working what looks like full-time hours for you, it could signal to the IRS that they’re more like an employee.
5. Ex-Employees Turned Contractors: If you’ve recently switched a bunch of employees to contractor status without significant changes in their roles, the IRS might raise an eyebrow.
6. Lack of Contracts or Inconsistent Agreements: Not having clear, consistent contracts outlining the nature of the work can be a trigger.
7. State-Specific Rules: Some states have stricter rules for classifying workers, so make sure you’re up-to-date with your state laws.
Best Practices to Stay Clear
Okay, so how do you avoid triggering an audit? Here are some pro tips:
1. Issue 1099s Religiously: Make it a standard practice to issue 1099s to every contractor who meets the criteria.
2. Maintain Clear Contractor Agreements: Have well-drafted, clear contracts for all your contractors. Outline the scope of work, payment terms, and the independent nature of the relationship.
3. Monitor Working Relationships: Keep an eye on how much control you have over your contractors’ work. Remember, they should be free to work how, when, and where they want.
4. Separate Employees and Contractors: Be clear on the distinction between employees and contractors in terms of roles, benefits, and management.
5. Stay Informed and Compliant: Keep up with IRS guidelines and state laws regarding contractor relationships.
While 1099s offer flexibility and can be great for your startup’s agility and growth, they also require maintenance and internal auditing. Stay diligent, document everything, and when in doubt, consult with a tax professional or an HR advisor. It’s always better to be safe than sorry!
If you’re feeling overwhelmed, don’t sweat it. There are plenty of resources and professionals out there who love this kind of stuff (yes, really!) and would be happy to help you, fill out this form today for a one-hour consult:
