IRS Form 1099
August 2024
Treasurer Helen Curtis believes this corporation doesn’t have to file a 1099 for the Secretary even though she is paid over $600 a year and is classified as a contractor not an employee. Her decision is based on some absurd nonsense that if they subtract out the secretary’s expenses, they are paying her less than the $600 reporting threshold. No, we are not making this up.
Notice that Treasurer Helen Curtis has changed the $70 per month entry for the secretary. She is now calling it secretary expenses. The treasurer is doing this as a follow-up to her statement at a Board Meeting about not needing to file a 1099 for Secretary Sabrina Thomas. Is the treasurer helping the secretary avoid taxes? What other reason could there be for this? The treasurer is playing games with the corporate financials. This must stop! We even agree that a 1099 shouldn’t apply in this particular situation. That’s another reason Treasurer Curtis is being accused of incompetence. This is only one of many inappropriate/unlawful actions by this treasurer that will be outlined in this section.
In the early 2000s, employers and established businesses rarely sought out the work of independent contractors. Now, decades later this has changed significantly as employers are relying more and more on independent contractors instead of employees. While using independent contractors can have certain benefits, there can also be certain risks especially when it comes to classification.
Employers often prefer to use independent contractors as it allows them to avoid expenses associated with employees. Notably, independent contractors’ earnings are reported on Form 1099 and are not subject to tax withholding or employment tax remittances, such as FICA and state unemployment and disability insurance contributions. Independent contractors are also not eligible for the wide variety of benefits given to employees. Misclassifying employees as independent contractors can result in significant liabilities for employers, including payment of back wages to misclassified workers, retroactive tax liabilities (including penalties and interest), legal penalties, fines, and reputational risks.
On January 10, 2024, in an effort to minimize the misclassification of workers, the Department of Labor (DOL) published a final rule providing guidance on whether a worker is classified as an employee or an independent contractor under the Fair Labor Standards Act (FLSA). This final rule rescinds a prior rule proposed by the DOL on January 7, 2021, at the end of the Trump administration that never took effect following the change in administrations. The current final rule became effective on March 11, 2024. This rule aims to clarify the distinction between employees and independent contractors under the FLSA.
An employee is typically considered to be someone who performs services for an employer under the employer’s direction and control in exchange for wages or salary. Employees are entitled to various protections under the FLSA, such as minimum wage, overtime pay, and benefits.
An independent contractor, on the other hand, is an individual or entity that is in business for themselves and provides services to another entity under a contract or agreement. Independent contractors are not considered employees and are not entitled to the same protections and benefits as employees.
This final rule revises the DOL’s prior guidance by:
- Returning to the totality-of-the-circumstances analysis to classify a worker as an employee or an independent contractor under the FLSA;
- Explaining that all factors are analyzed equally, without assigning a predetermined weight to a particular factor or set of factors;
- Using the longstanding interpretation of the economic reality factors.
There are six (6) economic reality factors used to analyze employee or independent contractor status under the FLSA:
- Opportunity for profit or loss depending on managerial skill;
- Investments by the worker and the potential employer;
- The degree of permanence of the work relationship;
- The nature and degree of control;
- The extent to which the work performed is an integral part of the potential employer’s business;
- The worker’s skill and initiative.
The first economic reality factor would suggest that if a worker has no opportunity for a profit or loss then that worker is an employee. This factor would also suggest that some decisions by a worker that can affect the amount of pay that a worker receives, such as the decision to work more hours or take more jobs when paid a fixed rate per hour or per job, generally do not reflect the exercise of managerial skill indicating independent contractor status.
Overall, the six (6) economic reality factors are all weighed together to assess whether a worker is economically dependent on a potential employer for work. When these factors need to be fleshed out in more detail, courts will often look to additional subfactors found in both binding and persuasive case law to avoid misclassifying a worker.
The DOL regularly audits companies for compliance and aggrieved workers can file lawsuits seeking employment taxes, back wages (including overtime), unemployment insurance claims, workers’ compensation claims, claims involving benefits, and more. As such, it is vital that the Directors and Officers of this HOA ensure that they are engaging independent contractors in the correct manner. Importantly, they should understand the criteria to determine independent contractor status. The wording in our governing documents would have to be changed since it precludes the secretary from being classified as a contractor.
Since the Directors and Officers don’t understand this, they should submit IRS Form SS-8 for an opinion or seek legal counsel to clarify the employee and independent contractor classifications. If the Board agrees that Secretary Sabrina Thomas is an employee, they can look over the Voluntary Classification Settlement Program. However, the easiest way to fix this is to either start treating her as an employee or stop paying her. Be aware that if nothing is done the complaint/report form could be filed. Then the first step will require Form SS-8 to be submitted and then they will receive a ruling and the bill. Of course, Secretary Thomas has been claiming the income on her tax returns each year so the inquiry shouldn’t affect her negatively. She could easily put a stop to all this too.