Default: Under PA Unemployment Compensation law, which is presumed o apply for tax purposes, every person who performs services for which he or she is paid is an EMPLOYEE of the payor.
To not fall under the category of an “employee,” the worker must qualify as an Independent Contractor, which has TWO prongs:
1. Free from control or direction over performance of services BOTH under contract and in fact
- Provide services that are not so unique to the client’s business that they may only be integrated into that client’s business
- Set their own work hours
- Offer their services to the general public
- Make the termination of their employment subject to contractual agreement.
They DO NOT:
- Hire, supervise, and pay assistants for the employer
- Do their work on employer’s premises
- Do their work in the sequence set by employer
- Have to comply with employer’s instructions about the work
- Receive training from or at the direction of the employer
- Make themselves contractually required to submit regular reports to the employer
2. Customarily engaged in an “independently established trade, occupation, profession or business.” For their work to qualify as this, the individual must:
- Possess the essential tools, equipment and other assets necessary to perform the services independent of the person for whom the services are performed
- Realize a profit or suffer a loss as a result of performing the services
- Perform the services through a business in which the individual has a proprietary interest
- Maintain a business location that is separate from the location of the person for whom the services are being performed
- Have previously performed the same or similar services for another person while free from direction or control over performance of the services both under the contract of services and in fact, or the individual holds himself out to another person as available and able, and in fact is available and able, to perform the same or similar services while free from direction or control over performance of the services
- Maintain liability insurance during contract term of at least $50,000
A written agreement between a worker and the employer does not control worker’s status for PA state UC law purposes.
REMEMBER: Federal Safe Harbors: It is presumed that, if a taxpayer qualifies for one of the federal safe harbors, that PA will not contest such status.
Prohibits IRS from reclassifying independent contractors as employees for federal employment tax purposes under certain circumstances. DOES NOT APPLY FOR FEDERAL INCOME TAX PURPOSES, thus PA may not respect this for purposes of Form 1099 reporting or other state income tax issues:
- Person has been consistently treated as independent contractor since 1977;
- Employer has filed Form 1099s for them since 1978; and
- Employer relies upon reasonable authority such as IRS audit, court ruling or practice in a large segment of the industry to justify treatment of worker as an independent contractor
Safe Harbor DOES NOT APPLY to: certain technical personnel including engineers, designers and computer programmers.
Federal Statutorily-defined employees
Generally: a worker is an employee, if, after evaluating facts and circumstances, the worker qualifies as an employee under the common law (see 20-factor test).
Additional ways a worker can be an employee (rare): A worker is an employee is they fall under one of the following:
- Corporate officer
- Statutory employee (real estate agents, direct sellers, babysitting and elderly/disabled sitters businesses)
- Government employees covered under sec. 218 of Social Security Act
Rules for When Employers must file Form 1099s in PA
General: An employer must file a Form 1099-NEC for every independent contractor (i.e., someone who is not your W-2 employee) who performs services for your business.
In addition, an employer must file a Form 1099-MISC if they make payments under an oil and gas lease (i.e., rent, royalties, bonuses or other income paid pursuant to the lease contract) from PA sources.
What to file with the PA Dept of Revenue: copy of the federal Form 1099-NEC or MISC filed with the IRS.
How to file:
If an employer is required to perform electronic PA employer withholding for other employees: must also file the required Form 1099-MISCs electronically. Electronic submission is available through the Dept. of Revenue’s E-TIDES system.
Due Date: same day as IRS’ due date for electronic filing of Form 1099s.
If an employer is not required to electronically file employer withholding: the employer may still register and file electronically, but is not required to do so. They may also file on paper, however this is not recommended by the Dept. of Revenue. Paper forms are to be mailed to:
PA Dept. of Revenue
P.O. Box 280412
Harrisburg, PA 17128-0412
- Amounts reported: amounts paid by employer for entire calendar year.
- Changes in Reported Amounts
- The contractor is a PA resident, and the employer issues a corrected Form 1099-NEC to the contractor: The employer must file a copy of the corrected Form 1099-NEC with the Dept. of Revenue.
- The contractor is not a PA resident, and the employer issues a corrected Form 1099-NEC to the contractor: The employer must file a corrected Form 1099-NEC with the Dept. of Revenue ONLY if “the amounts related to income from within this Commonwealth changes.”Generally, this means a corrected form sent to the Dept. of Revenue is not required unless the correction in the federal Form 1099 was caused by a change in the amounts paid to the contractor for services rendered within the state of PA.
- Verification of contractor tax ID numbers: Dept. of Revenue suggests verifying the Social Security number of each contractor by viewing their Social Security card. For entities, the ID number should be confirmed with the IRS notice originally assigning their EIN number.