1099s & Contractors

Why this matters

Misclassifying an employee as a 1099 contractor is one of the most expensive mistakes a small rental business can make. If the IRS or state labor department reclassifies your worker, you can owe back payroll taxes, unpaid overtime, workers' comp premiums, penalties, and interest, sometimes years of it.

The classification test

The IRS looks at three categories of factors:

• Behavioral control, Do you tell them when, where, and how to do the work? Do you train them? Employee.
• Financial control, Do they have their own equipment and tools? Do they invoice you? Could they make a profit or loss? Contractor.
• Type of relationship, Is the work indefinite? Is it a core part of your business? Do you provide benefits? Employee.

Reality check: most "delivery helpers" who show up at 8am wearing your shirt, in your truck, doing what you tell them, on a regular schedule, are employees, not contractors. State tests (especially California's ABC test) are even stricter.

Who legitimately is a 1099 contractor

• An LLC that does your bookkeeping monthly.
• A photographer you hire for a marketing shoot.
• A repair shop that fixes your inflatables.
• A subcontractor business that handles overflow deliveries with their own truck, insurance, and team.
• Your CPA, attorney, or marketing consultant.

When you have to file a 1099-NEC

• You paid an unincorporated contractor (sole prop, single-member LLC) $600 or more during the calendar year for services.
• The payment was for services, not products.
• You did not pay them via a payment processor that issues a 1099-K (Stripe, PayPal business, Square, those are reported separately).
• Form is due to the contractor AND filed with the IRS by January 31.

Generally, you do NOT need to issue a 1099 to a corporation or to an LLC taxed as an S-corp or C-corp, but you should still collect a W-9 from every vendor to confirm.

The W-9 habit

Before you cut a contractor their first check, get a signed W-9. It tells you their legal name, EIN or SSN, and tax classification. Without it, you may be required to withhold backup withholding (currently 24%) on payments, and you'll be scrambling in January trying to track people down.

If you have employees

• Use a payroll service (Gusto, ADP, OnPay), don't try to calculate withholding manually.
• Carry workers' compensation insurance, required in almost every state once you have a W-2 employee.
• File quarterly Form 941 (federal payroll tax) and your state's equivalent.
• File W-2s for each employee by January 31.
• Post the required state and federal labor law posters where employees can see them.