Limited liability companies (LLCs) often engage independent contractors, not employees, to perform specific tasks or services. These contractors receive Form 1099-NEC, not a W-2, reflecting their independent status. This distinction stems from the IRS’s classification criteria, focusing on behavioral control, financial control, and the relationship of the parties. For instance, a graphic designer hired by an LLC for a single project, using their own equipment and setting their own hours, is typically considered an independent contractor.
Proper classification is crucial for both the LLC and the worker. Accurate classification ensures compliance with tax laws, avoiding potential penalties and back taxes. It also impacts worker benefits and protections, such as unemployment insurance and workers’ compensation, which typically apply to employees but not independent contractors. The evolving legal landscape regarding worker classification underscores the need for businesses to remain informed and adapt to changing regulations.