1099 vs. W-2: The Overlooked Issues of Tax Compliance

Recently, a boom in “on demand” services has caused a heated debate over the issue of 1099 versus W-2 reporting. Many start-up and application-based companies are finding themselves having to decide whether to declare workers as employees, thus reporting with a W-2, or as independent contractors, which requires the use of a 1099-MISC form. Aside from filling out different forms, what many of these employers are not considering when they opt to use 1099’s are the steps needed to comply with the associated tax regulations. The debate over this issue has been focusing on the types of reporting, and the pros and cons of each. What businesses should instead be focusing on is efficiency while still maintaining tax compliance. To ensure tax compliance, businesses must issue Form 1099-MISC to their independent contractors for filing. These forms must be submitted to contractors by January 31, and have data transmitted to the IRS by March 31. Seems straightforward, doesn’t it? However, businesses do not realize that taking on the challenge of 1099 reporting can be incredibly difficult, time consuming, and expensive if an automated system is not in place. Though the 1099 reporting deadline only occurs once a year, the entire process is time consuming and should be done in stages throughout the year to streamline compliance. Without some sort of system, companies run into many issues – forms and information must be processed through multiple internal departments and often bounce from person to person. Without one centralized source, businesses need to have many systems in place to keep up with the rules and regulations of 1099 reporting year round. Businesses also need to complete a large amount of research and data tracking to be compliant, and the IRS requires that data be kept on record for at least three years prior for auditory purposes. By leveraging centralized, scalable technology, companies can reduce the amount of time, money, and resources being allocated towards chasing the complexities of the IRS. Though smaller businesses may have a lesser reporting obligation currently, many of these companies find themselves becoming incredibly successful and their rapid growth can cause additional complexity when state reporting comes into the picture. As they attempt to continue using the same processes they have used in the past, they find these methods are not scalable to their increase in size, success, and growing needs. Finally, companies do not consider things that happen out of season that impact 1099 reporting and compliance. For example, changes to rules, such as penalties increasing for improper filing or the ongoing effort needed to ensure proper documentation on independent contractors to safeguard compliant reporting. Neglecting these issues throughout the year can cause a company hefty fines and leave them struggling to correct data. Ultimately, the debate between 1099 and W-2 is not the most important issue – ensuring your company maintains tax compliance is.