All small businesses love 1099 "employees" because there is no Workman's Compensation insurance expense, payroll taxes, withholding, medical insurance, and reports to be filed.
The minimum costs are about 25% more to classify the people as not-real employees. The problem is when the pseudo employee files an unemployment claim, a Workman's Compensation injury claim, or the state/ federal government catches it on a tax return audit.
The costs of employment will ratchet upward later in 2013 because of the Obamacare taxes and fees.
There will be, however, 16,000 new IRS auditors to make sure all the bases are covered. As a rule, if your business provides a place of work, company vehicle, tools, handle the billing and scheduling for the jobs, and collect the payment for the work, you have a bona fide employee.
There are considerable penalties for improper classification, most of which can put you out of business. Incidentally, a corporate officer must be on wage payroll, can never be a non-employee of his own business unless he is a passive investor.
A current controversy is over Subchapter S Corporations which act as business flow-through income as a partnership business would. Owners and professionals who opt not to be employees of their own business, will be corrected and taxed in the wave of new audits being conducted.
This matter will be addressed with more compliance audits to determine if the owners are active in their business [employee] or passive investors. A note to remember is that taxes collected for withholding and other items shown or not shown in payroll reports are specially known as TRUST FUND taxes because they are collected by the business for the benefit of the state and federal governments.
There are special penalties for non-compliance in this area and the taxes are unforgiveable in bankruptcy or long life spans with some corporate liabilities passed on to the individual officers.
* Phillip B Chute is an Enrolled Agent, tested, licensed, and appointed by the IRS directly. He has prepared or supervised over 25,000 tax returns over 30 years.