In 2018, NPR reported that nearly one in 10 Americans ware 1099 contractors. That increased to 30% by 2019, and by all accounts, the number continues to rise. This creates a dilemma for employers tasked with dealing with the tax and labor status of a diverse workforce. How can you be sure you’re treating your 1099 employees fairly under the letter of the law? Are they covered by workers’ compensation? How is hiring and pay handled when you’re contracting? We have answers that can help you stay on the right side of the law when dealing with 1099 employees.
Workers’ Comp or Not? Labor Classifications for 1099 Workers
If your employee is truly an independent contractor, you are not legally obligated to pay payroll taxes or workers’ compensation benefits. However, NOLO points out, “some employers misclassify employees as independent contractors to avoid paying payroll taxes and workers’ comp premiums for them.”
While this may save employers in the short run, misclassifying an employee as a 1099 worker will catch up with you in the long run. The
How can employers know the difference and avoid costly lawsuits like the one against Lyft and Uber in California? NOLO says there are some important distinctions for independent contractors that full-time employees do not have. For example:
- Independent contractors offer a contract service that does not require the direction of the employer. The contractor provides the service and can make decisions about how the work is conducted and who does it.
- Independent contractors do not need to be formally hired. They typically receive payment by the job. Employees receive an hourly or salary wage.
- Independent contractors typically do not receive equipment to do the job, unlike an employee, who receives equipment from the employer.
- Independent contractors almost always work for several companies. If the job requires a set level of skills and the worker performs just one job, they are likely independent contractors. If the employee is trained by and receives regular work from the same company, they may be considered an employee under the law.
According to CHRON, most states do not require companies to carry workers’ compensation for 1099 contractors. Workers’ compensation is an insurance policy that covers workers who are injured on the job. The states administer these policies, although the requirement to carry this insurance stems from federal law. But that makes handling workers’ compensation tricky because it varies by state.
To protect your company, it’s a good idea for contractors to provide an insurance certificate that shows they are covered for their business practice. Sole proprietors should also maintain a bond rating and insurance. But also check state requirements. For example, Alabama only requires workers’ compensation on businesses that have five or more employees. Alaska is the opposite, requiring this insurance from the first person you hire. But again, if the worker is a 1099 contractor, you won’t need to worry about workers’ compensation.
Are you worried that your business is compliant with the varying labor and tax laws?
Given the frequent changes to the regulatory environment these days, your worry is not unfounded. But organizations like FoxHire are designed around eliminating this type of risk for our clients. Talk to our team about how an employer of record company could help you stay on the right side of the law.