This age old question is one to reevaluate on a regular basis within your company if you are paying workers under a 1099 contract. Why is this so important? If you, the business, are paying a worker as an independent contractor, you are not responsible for any federal, state and local taxes. Of course this is what a company would prefer. However, our friends at the various governmental agencies are smart enough to know this and keep a heightened awareness of appropriately classifying workers. Let’s review a few common law rules spelled out by the IRS to determine classification.
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
- Our Comment: If the company has any control over what and how the worker performs the job, he/she is potentially an employee.
- Financial: Are the business aspects of the worker’s job controlled by the payer? (Including how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
- Our Comment: If the company determines the pay and provides the tools and supplies needed to complete the job, he/she is potentially an employee.
- Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue after a project is completed and is the work performed a key aspect of the business?
- Our Comment: If the worker has access to benefit plans, if the work is a key aspect of the business, and work is performed on a continuous basis, the worker is potentially an employee.
As you can see there is no cut and dry determination on whether a worker is truly an employee or not, so a business must weigh all of these factors and make an educated decision with a reasonable basis.
Consider these additional scenarios:
- Lulu is a professional sewer. She provides project services for various manufacturers and individuals. She works from home with her personal sewing machine and is only given an overall view of what the end product needs to be. She completes projects on her own schedule. Lulu is an independent contractor.
- Jack is a part-time seasonal warehouse worker. He works at a regional distribution plant from November 1st to December 31st for the holiday season. The company set Jack’s hourly pay rate, his schedule, and the duties he will be performing. Despite his part-time, seasonal nature, Jack is an employee.
We always want our clients to be protected, so regardless of our involvement in your payroll activities, we will always be available for discussions on confirming whether you are appropriately classifying your workers. Remember, this is a good exercise to revisit over time or when a new service contract is executed. It is possible to have a worker begin as an independent contractor and over time evolve into an employee.
Refer to the IRS guidelines through this link: https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee
Samantha Wolf, CPA