Similar to documentation required for hiring an employee, companies must acquire certain documentation from their subcontractors. Without this documentation, most likely the hiring business entity will face stiff penalties and expose their company to unnecessary risk.
Definition of a Subcontractor
The IRS sets the standards to determine the employer/worker relationship. In general, all workers are considered employees unless they can pass tests to be considered a subcontractor. The definition of a subcontractor is defined by state law and the Internal Revenue Code along with IRS regulations.
The Internal Revenue Service promulgates rules and regulations concerning the employment status of workers. In general, workers are classed as W-2 employees and certain tests must be met to have the worker classed as a 1099 subcontractor. All 1099 subcontractors should be issued a Form 1099 in January of each year for the prior calendar year of services. This article describes the general tests that must be met for the worker to be considered a 1099 subcontractor.