What are the risks/benefits regarding 1099 employees?

Situation:
Many small business owners believe they should only use contract or 1099 type employees as it makes the hiring process easier and creates no liability on their part for employee benefits, taxes, or unemployment. While this is usually true there are exceptions that can be expensive for a business owner. Workers compensation, the IRS, and the new health care act are all beginning to play a more major role in deciding if a 1099 employee is really as independent as employers think.

Before you can determine how to treat payments you make for services, you must first know the business relationship that exists between you and the person performing the services. The person performing the services may be -
• An independent contractor
• An employee (common-law employee)
• A statutory employee
• A statutory nonemployee
(The links for the definitions are supplied by the IRS and subject to change on their website.)

Analysis:

  1. In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered.
  2. Facts that provide evidence of the degree of control and independence fall into three categories:
    1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
    2. Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
    3. Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
  3. Does the person providing the service work over 30 hours per week? If so then the employer is probably required to offer health care insurance. This is currently only required for an organization that has over 50 employees. It is not clear if this also applies to businesses that have over 50 full time equivalent (FTE) 1099 employees and the law can be changed to lower the threshold for the number of employees.

Solution:
Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.

The keys to defining a worker as employee or independent contractor are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination. Call on ASBC to help you determine the best classification for your workforce.

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