What Are Independent 1099 Sales Reps?
One way of ensuring maximum results out of your sales force is hiring them as independent contractors. Independent 1099 sales representatives earn their income through commissions only. For some small businesses, this can mean the difference between survival and having to close the business. Workers who receive only commissions are called 1099ers because of the Internal Revenue Service form you send at the end of the year. Instead of the W-2 that you send hourly and salaried employees, independent contractors receive Form 1099-MISC.
The Internal Revenue Service has strict regulations on what it considers common-law employees. You must withhold taxes, Medicare and Social Security from common-law employees and your business must match the withholding for Medicare and Social Security. Typically, if your business has behavioral or financial control over the worker, depending on the type of relationship the worker has with your business — is there a contract and do you provide benefits — the IRS can reclassify your sales representative as an employee. If the sales representative controls how and when he sees potential customers, pays all of his own expenses without reimbursement and your contract with him specifies that he is an independent contractor, he is a legal contractor.
The IRS has eight special rules for sales representatives when determining their status. According to the IRS, if the representative works full time for your business, receives sales orders that he then gives to you for fulfillment, sells items to customers for resale, sells to the hospitality industry or contractors, performs the majority of his sales personally, has no investment in your company and has a continuing relationship with your company, he is still an employee even if, under common-law rules, he doesn’t qualify. While the worker must meet all eight requirements for consideration as an employee, if he does, you must withhold state and federal taxes and match Medicare and Social Security withholding.
Your contract with your independent 1099 sales representatives is one of the best methods you have of proving that the worker is an independent contractor. According to Nolo, your contract should specify that the worker is an independent contractor and contain a description of what the representative does, how much and how often you pay, a description of how he earns his commission, such as 10 percent of every sale and a statement saying that the sales representative pays for his expenses and what, if anything, you reimburse. Other items that contract should specify include a statement that the sales representative is responsible for all taxes on earned income, specifications on the cancellation of the contract and a statement saying that the representative is not entitled to any benefits you provide to your employees.