- Q: "We hired an employee last year, but he's not working out. How can we fire him without getting sued?"
- Sending Out Form 1099
- Q: "When do I have to give people a 1099 form if they help me out with my eBay selling business during the year?"
- Q: "Do I have to give 1099 forms to drop shippers and people who consign stuff for me to sell on eBay?"
- Q: "I am a very small sole proprietor and have provided over 0 in services to twelve customers in 2006, but I have received only one 1099 form to date. Am I responsible for the customers who have not mailed me the 1099? Some of my customers have sent me W-9 forms, but I haven't responded because I don't want them to know my Social Security number. My accountant told me I might be penalized for not responding to a request for a W-9 form. I am ready to mail my tax returns, but I don't know if I should mail them in without the 1099 forms from my customers. What should I do?"
Q: "We hired an employee last year, but he's not working out. How can we fire him without getting sued?"
A: Very, very carefully. These days, if you so much as look at an employee cross-eyed, the person goes looking for a lawyer. There really is no 100 percent foolproof way to make sure you won't get sued by a disgruntled employee, but here are some tips that will make it really tough for the person to prove a case against you:
• Make sure there are no surprises. Give employees a performance evaluation with specific criticism and give them the opportunity to improve before you fire them.
• Don't give employees a raise or a positive performance evaluation and then fire them two weeks later. Employees should never be shocked when you deliver the bad news.
• If the person you're firing is your company's only female, Asian, or African American employee, go to extra lengths to document and explain that the termination is performance related.
• Always fire people on a Monday, never a Friday, so they don't have the chance to "stew" over the weekend and come in to the office on Monday morning with a 12-gauge shotgun.
• Escort employees to the door immediately after firing them—don't let them hang around the office and poison your relationship with other employees. If they have to stop by their desk to pick up personal belongings, make sure someone is standing there watching them so they don't change all the passwords on the office computer.
• Call a meeting of your remaining employees, explain that "so-and-so will no longer be working with us" (don't give reasons!), and reassign the terminated employee's duties to other employees. This will help keep the rumor mill quiet.
• Offer fired employees an extra week's severance pay in exchange for having them sign a liability release. Be sure to have an attorney draft this (don't ever pull one of these off the Web!), as there are special provisions that have to be included if the terminated employee is age forty or older.
• Signal to fired employees that you will not give a negative evaluation if their future employer calls you and asks for a reference. Be as specific as possible about what you will and will not say.
• Don't challenge employees' applications for unemployment benefits. They usually get the benefits anyway, no matter what you tell the unemployment office, and the hearing or proceeding is usually tape-recorded so fired employees have excellent ammunition for a lawsuit against you if you say something stupid during the hearing.
For more information about firing employees, see Chapter 12 of my book The eBay Seller's Tax and Legal Answer Book.
Sending Out Form 1099
Q: "When do I have to give people a 1099 form if they help me out with my eBay selling business during the year?"
A: If someone worked for you as an independent contractor and you paid that worker more than $600 during the year, you must send that worker an IRS Form 1099 no later than January 31 (postmark date) of the following year, and send copies to the IRS and your state tax authority by no later than February 28 or 29 of the following year, along with IRS Form 1096 (basically a cover letter for the 1099).
Technically, that means every independent contractor, including lawyers, accountants, other professionals, drop shippers, and people who give you stuff to sell on eBay, needs to get this form. But you can use some discretion here. The people who absolutely must get 1099s are people you do not think are intelligent, disciplined, or honest enough to report your payments as income on their tax returns. Sending someone a 1099 insulates you from liability if that someone decides to hide income from the IRS.
If you send 1099 forms out late, you have to pay a $50 penalty to the IRS for each overdue 1099. You also incur the wrath of your contractor, who probably has already filed a tax return and now has to amend it to attach your 1099.
Note: You cannot download 1096 and 1099 forms from the IRS website and send photocopies to people. This is one of the few cases where the IRS requires you to use the actual paper form. You can get them from your nearest IRS field office (look in the telephone book in the blue government pages), or order them online from the IRS website (irs.gov)—and don't wait until January 30 to do so.
Q: "Do I have to give 1099 forms to drop shippers and people who consign stuff for me to sell on eBay?"
A: If the drop shipper was a corporation or a limited liability company (LLC) with more than one member, the answer is no. These people are deemed to be business professionals who should know their responsibility to pay taxes.
If the drop shipper or consignor (that's somebody who consigns stuff to you to sell on eBay) was an individual or partnership, and you paid them more than $600 total during the calendar year, you are required to send them a 1099 form by January 31 next year.
If the drop shipper or consignor was an LLC with only one owner (called a member), and you paid them more than $600 total during the calendar year, send them a 1099 form by January 31 next year, even though you are not technically required to do that. A single-member LLC is considered a disregarded entity for tax purposes—in other words, inseparable from the person who owns it—and the rules aren't 100 percent clear about what you should do in this situation if your contractor fails to pay taxes and the IRS disregards his LLC. It takes about fifteen minutes to fill out Form 1099. For the peace of mind it gives you, if nothing else, it is worth the effort.
Q: "I am a very small sole proprietor and have provided over $600 in services to twelve customers in 2006, but I have received only one 1099 form to date. Am I responsible for the customers who have not mailed me the 1099? Some of my customers have sent me W-9 forms, but I haven't responded because I don't want them to know my Social Security number. My accountant told me I might be penalized for not responding to a request for a W-9 form. I am ready to mail my tax returns, but I don't know if I should mail them in without the 1099 forms from my customers. What should I do?"
A: You must, of course, report all income your customers paid you and pay taxes on it, whether or not they sent you a 1099 form, but you are not required to attach 1099s to your tax return if your customers forgot to send them to you. Just attach the ones you did receive to your Form 1040 and off you go. It is your customers who should be concerned that they didn't send you 1099s. If you fail to report income you received from them and are later audited by the IRS, they may get caught up in your audit.
The W-9 question is a bit trickier. Form W-9, which is a Request for Taxpayer ID Number, is usually sent to independent contractors and others who must receive a Form 1099 at the end of the year. If someone sends you a W-9 form, you must fill it out and return it within thirty days. Otherwise, your customer may be required to withhold 31 percent of the interest, dividends, and certain other payments they make to you. This is called backup withholding. Furthermore, you may be subject to a $50 penalty from their failing to provide a W-9 upon demand.
Your reluctance to give your Social Security number to your customers is understandable. To avoid that, get a federal tax identification number for your business and use that on any W-9 forms you have to sign. Better yet, form a corporation for your business—that way, your customers won't have to send you Form 1099s at all, making you both very happy.