What is Non-Employee Compensation?

Businesses usually hire employees to carry out the daily tasks of operating the business. Business owners can compensate employees in a variety of ways, including being paid by the hour, a flat salary, or commission based on sales. Employee compensation is reported on Federal Form W-2 and filed annually with the Social Security Administration and state tax agencies. The W-2 provides information on earnings, and taxes withheld and matched, along with a host of other employee-related payments such as fringe benefits, employer contributions to health savings accounts, and contributions to certain retirement accounts.

Self-employed taxpayers, also known as independent contractors, are usually considered non-employees. Form W-2 cannot be used to report non-employee compensation, and taxes are not normally withheld on earnings. Form 1099-MISC is used instead to report miscellaneous income of $600 or more (based on 2013 guidelines) to federal and state tax agencies.

Not all taxpayers receiving Form 1099-MISC consider themselves self-employed. Some may not have established a formal business or even be interested in self-employment. But if a Form 1099-MISC is generated, the business or organization making the payment has determined that an employer-employee relationship does not exist.

Even after this determination has been made, it does not mean it is set in stone. To aid with this complex determination, the Internal Revenue Service (IRS) offers information online, including Publication 1779 and Topic 762: Independent Contractor vs. Employee. The subject of control is one of the most important factors to consider in establishing whether an individual is an employee or non-employee. Specifically, the IRS looks at behavioral control and financial control, as well as the relationship that exists between the two parties.

If the taxpayer disagrees with this non-employee status, they can submit Form SS-8 to the IRS. This form requests that the IRS review the situation and make an official determination.


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