An extremely hot topic in the equine industry is determining whether those you hire should be classified as employees (W-2) or as contractors (1099). The reason why this is so important is because employers can be held liable for employment taxes for an employee incorrectly paid as a contractor. This could also result in heavy fines or even additional liability for those who should have received workers' compensation and were injured on the job.

Paying a contractor that simply receives a 1099 at year end is always much simpler and cost effective than starting payroll for an employee. This is usually the biggest reason for misclassification in the horse world.

Running payroll typically involves hiring a payroll provider, keeping track of hours, overtime, and breaks for hourly wage employees, along with withholding, tracking, and remitting those payroll taxes which include not only the employEE portion of federal income tax, social security taxes, and Medicare taxes but also paying the matching employER portion of social security, Medicare, and unemployment.

Whew! It's a lot to keep track of, but it's the necessary cost of running a business.

How do I know if I have an employee or a contractor?

The IRS lays out the guidelines for determining whether you have a contractor or employee, but unfortunately, while there a number of tests you can do,  there are no hard and fast rules or one size fits all scenarios.

You may find that while reviewing the categories given below that, in some instances, several factors may point to the worker being an employee while others indicate they could be a contractor. When making this decision, look at all factors as a whole and the relationship in its entirety when determining the employers right to direct and control the worker.

The best thing for you to do as a business owner is review these guidelines for each employee, write up a short assessment for why the worker fits one category or the other and keep it with your records for that individual.

What are the IRS Guidelines?

The IRS outlines what they refer to as the Common Law Rules. This is composed of three categories that help us to determine the degree of control and independence present in the worker's capacity to perform the work they are being hired to do.

The first element to look at is the Behavioral aspect. Does the employer have the right to control or direct what work is done and how it is done?

The second is Financial control of the worker. Who controls the payment terms of the relationship? Is it the employer or worker who decides how they are paid, who provides the tools and resources to perform the job, or even if expenses are reimbursed?

Lastly the Type of Relationship should be examined. Are any benefits being provided that may be of an employee nature (paid vacation, pension plan, sick days, insurance, etc.), how long into the future are they expected to work for you?).

TIP:  Click on the links to see the full description of each category of control provided by the IRS.

I need help with Payroll or 1099 creation!

You may be super business savvy and have all your ducks in a row with plenty of time to perform you own bookkeeping, payroll, or 1099 work - congrats! But if business is booming and you need some help wading through all this clerical work, set up a time to chat with me about how Legit Ledgers can help you get your equine business on the fast track for being organized, compliant, and successful!