Classify Individuals: Employee vs. Subcontractor

What happens here

When hiring your first person, the very first critical step is to correctly classify them. If they are a subcontractor, they must complete an IRS Form W-9, providing their Federal Identification Number (FEIN) or Social Security Number (SSN) if they are a sole proprietor. This form is essential for the business to issue a 1099 form at the end of the year for tax reporting. Failure to issue a 1099 or misclassifying a subcontractor can lead to significant fines and penalties from the IRS. Conversely, if the individual is an employee, they will need to fill out a Form W-4, which is used to determine the correct amount of income tax to withhold from their paycheck.

Goal: This step details the initial determination of whether a new hire will be an employee or a subcontractor, outlining the specific IRS forms required for each classification and the associated tax reporting responsibilities.