As government agencies increasingly work together to stop 1099 Independent Contractor (IC) misclassification, it is more important than ever that your clients correctly classify their workers. The IRS provides a test that can be applied to determine proper classification, and it is structured into three main categories: behavioral control, financial control, and type of relationship. You can read more about this test at https://www.irs.gov/taxtopics/tc762.html but suffice to say the more control a business has over a worker, the more likely that worker is an employee and NOT an independent contractor.
Some smaller businesses think they will just fly under the radar. However, there are some common red flags that can attract a government audit:
- IC receives both a W-2 and 1099 in the same year (occurs when an IC is converted to a W-2 or vice versa). This includes converting employees to ICs to avoid costs and burden of the Affordable Care Act (ACA or Obamacare).
- IC files an unemployment claim (ICs aren’t covered under company’s unemployment insurance).
- IC files Workers’ Comp claim (ICs can only be covered under their own Workers’ Compensation policy as a self-employed individuals).
- Worker feels he/she has been improperly classified and files a complaint with a government agency
- Government agency receives an anonymous tip.
As you can see, it wouldn’t be that difficult for a small business to suddenly come under government scrutiny. If your clients have ICs, you may want to encourage them to audit their own workforce to ensure everyone is properly classified. If not, you could help them convert those workers to W-2 employees and then outsource the employment of those employees to a provider of recruitment back-office solutions so that the company does not have to incur cost and administration associated with having the workers on their payroll.
This general summary of law should not be used to solve individual problems since changes in fact situation may require a material variance as to the applicable law. This article is for information purposes only and should not be construed as legal advice.