Question

If I compensate my day laborers with cash pay, how do I report them?

Answer

It depends on the relationship between you — the business — and the day workers. This will determine if the day laborer is your employee or self employed. If you have control over the worker’s behavior, the worker is usually your employee.

To figure out if a worker is your employee, consider how much you control the employee and the employee relationship in these areas:

  • The worker’s behavior, like:
    • When and where the day labor is done
    • What tools or equipment is used
    • Who’s hired to assist the worker
    • Where the worker buys supplies
    • Which worker performs specific work
    • How the work is performed (order or sequence)
  • The financial contract labor relationship, like:
    • How you pay the worker
    • If you’re required to reimburse the worker for business expenses

You must also consider the work relationship, like:

  • If there’s a written contract describing the relationship you and your worker intend to create
  • If you provide the worker with employee-type benefits, like:
    • Insurance
    • Pension plans
    • Vacation pay
    • Sick pay
  • If the relationship is intended to be permanent or for a specific period
  • If you rely on the worker’s services as a key part of your business

You can ask the IRS to determine if a worker is your employee. File Form SS-8: Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.

Report wages you paid to an employee on a W-2 and W-3:

  1. Complete the W-2 and give copies B, C, and 2 to the employee by Jan. 31, 2021.
  2. Send the W-2, copy A with W-3 to the Social Security Administration by the last day of February — or the last day of March if you e-file the W-2.

Report payments you made to an independent contractor on Form 1099-MISC:

  1. Give 1099-MISC, copy B to the worker by Jan. 31, 2021.
  2. File 1099-MISC, copy A with the IRS by Feb. 28, 2021 — or March 31, 2021, if you e-file.

You only need to file the 1099-MISC if your payments to an individual worker are more than $600 for the year.

 

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