IRS 1099 Employee Rules

A person who receives a 1099, such as an independent contractor, is not considered a regular employee. According to the IRS instructions on form 1099-MISC, for each person a business pays for services, the business must complete a form 1099-MISC. The form is most widely used to report amounts earned and paid to independent contractors. A management consultant is an example of a worker who a company must issue a 1099 form for.



The IRS provides specific guidelines for determining if a worker is an employee or an independent contractor. These guidelines include what the IRS called Common Law Rules, information that relates to the degree of control or independence an employer has over a worker. These rules are behavioral-, financial- and relationship-related.

Behavioral Rule

• According to the IRS, the behavioral rule relates to on what basis a worker performs. If a company has the right to control the activities of a worker, he is not an independent contractor. The IRS divides this behavioral determination into such factor as the type of instructions given, the extent of instructions, evaluation systems and training.

  An employee does not qualify as an independent contractor, for example, when an employee is instructed when and where to work, provided direction about what tools and techniques to use on the job and where to purchase material required for him to do the job. If a worker receives training on performing his work, this is another factor for not considering a worker an independent contractor.

Financial Rule

• The financial rule relates to how a company handles finances related to the worker. Independent contractors have expenses related to their work that are not reimbursed by the company they are doing work for. Another factor is the ability to have a profit or loss. If a worker has the opportunity of incurring a loss, he is considered an independent contractor.

Relationship Rule

• If a worker receives employee benefits from a company, he is not considered to be an independent contractor. Such benefits could include, but not be limited to, health care coverage or contribution to a worker's IRA account.

Term of Relationship

• If a worker is considered to be associated with a company for a period that could continue indefinitely, that employee would not be considered an independent contractor.

Services

• If the type of work a worker performs is closely related to the business he is associated with (such as an accountant working with an accounting firm), the role of him being an independent contractor would be subject to questions.