Some employers swear by using contractors in their company. I’ve met several companies that have almost their entire workforce built up around using “1099 employees” to deliver services to their customers. They having a staff, without the administrative overhead and legal obligations having a staff inherently brings.
The problem lies in the fact that 1099 employees don’t exist! I’m sure you’re wondering what I mean by that, so let me explain.
1099 vs w2 – what’s the difference?
Your staff members are either a 1099 (independent contractor) OR they are an employee that receives a W2 at the end of the year. They can’t be both a 1099 and employee at the same time.
I know that sounds like common sense when I lay it out like that, but many employers don’t understand when someone should be classified as an independent contractor as opposed to an actual employee. By blurring that line, they can open themselves to a host of problems, and lawsuits, from misclassified workers.
The IRS GUIDELINES for employment statuS
I’m going to hit the highlights that are commonly misunderstood here, but you can view the full document at the IRS’ website here http://www.irs.gov/pub/irs-pdf/p15a.pdf
If someone is a 1099 Independent Contractor…
- They will supply their own equipment that they need for the work. If you require certain equipment or software, you are not required to supply it. If the contractor doesn’t own the equipment or software you require, then you simply choose to move on and not use them as a contractor, but you cannot force them to obtain it.
- They are free to seek out other business opportunities. Yes, this does mean that they can choose to work for your competitors at the same time they are working for you. They can also work in direct competition with you by offering the same services you are paying them for to their own customers.
- They are typically paid a flat fee, or based on time + materials basis as opposed to a regular pay schedule. There are a few exceptions to this – such as legal professionals, in which is makes it more sense to pay hourly.
- They can make a profit by working for you – but they can also experience a loss. Where an employee wouldn’t experience losses.
- You don’t provide benefits to them, such as: insurance, pension plans, vacation pay, sick pay, or worker’s compensation.
- You don’t engage them with the intention (expressed or implied) of the relationship continuing indefinitely. Instead, you are hiring them for a specific project or period of time.
- You don’t have control over their day-to-day activities. If they are performing vital business functions, and you need to oversee this work to ensure success running your company, then you probably need an actual employee instead of a 1099.
a few Industry Examples
This example is a pretty common scenario where an employee is classified as a contractor when they are really an employee:
Milton Manning, an experienced tile setter, orally agreed with a corporation to perform full-time services at construction sites. He uses his own tools and performs services in the order designated by the corporation and according to its specifications. The corporation supplies all materials, makes frequent inspections of his work, pays him on a piecework basis, and carries workers’ compensation insurance on him. He does not have a place of business or hold himself out to perform similar services for others. Either party can end the services at any time. Milton Manning is an employee of the corporation.
This is an example of an independent contractor being used correctly:
Rose Trucking contracts to deliver material for Forest, Inc., at $140 per ton. Rose Trucking is not paid for any articles that are not delivered. At times, Jan Rose, who operates as Rose Trucking, may also lease another truck and engage a driver to complete the contract. All operating expenses, including insurance coverage, are paid by Jan Rose. All equipment is owned or rented by Jan and she is responsible for all maintenance. None of the drivers are provided by Forest, Inc. Jan Rose, operating as Rose Trucking, is an independent contractor.
You can find more examples provided by the IRS on pages 8-10 of their pdf: http://www.irs.gov/pub/irs-pdf/p15a.pdf