My business has been issuing 1099s to workers who I just learned are employees. How should I fix this mistake?
Once you realize that you have misclassified workers you thought were independent contractors, you should take the following actions to correct your mistake - assuming you are not under audit:
Immediately stop what you've been doing wrong and put the workers on the payroll.
Best practice. Go back to the beginning of the year and treat every payment to the workers as payroll. This will require filing federal and state employment tax returns some of which will be delinquent; consequently, there will be late filing and late payment penalties and interest.
Consider correcting the misclassifications in prior years. In addition to the consequences described above, you will need to issue corrected W-2s using Form W-2C. Note: Your employees may need to file amended income tax returns.