I’ve working in the PEO industry since 1998 …. I often get questions, actually seen, and heard of businesses classifying workers under “1099 – Independent Contractor” when they actually should be classified as a “W2 Employees”.
Those businesses think using a 1099 is the correct or most cost effective route they want to go … it could be the wrong choice and a costly choice.
1099s and W-2s are two separate tax forms for two different types of workers filed by employers.
An independent contractor receives a 1099 form that is issued at the end of the year for payments of services rendered. There are no taxes withheld nor workers compensation premiums are not collected on an independent contractor. The independent contractor is responsible for all taxes to the government reflected in the 1099.
An employee who receives a W-2, payroll taxes are automatically deducted from the paycheck and then paid to the government through the employer. The employer pays the matching portion of Social Security & Medicare Taxes. Workers Compensation premiums apply to the said wages, and the employer may be responsible for benefits and PTO if it applies to other employees within the company.
If you’re ever unsure of the correct classification, the IRS has set forth a 20-point check factor test in determining whether or not the individual performing services would be classified as a 1099 Independent Contractor or a W2’d Employee. The same factors are used for all states: https://galachoruses.org/sites/default/files/IRS-20-questions-W2-vs-1099.pdf
Below are some of the checks points used when determining the classification.
Work hours are set by the company and usually consist of a fixed schedule.
Work process is defined by the company and training is provided to workers by the company.
Workload is assigned by a supervisor and workers are required to meet set criteria for performance.
Equipment, tools and supplies required to perform the tasks are provided by the company.
Workers have a single employer
W2’d employees receive benefits. If your organization offers: PTO, 401K, workers compensation coverage a W-2’d employee is eligible for those type of benefits. 1099 contractors are exempt from those benefits along with many employment laws
1099 Independent Contractor
Work schedule is determined by the worker.
Assignments are accepted on a case-by-case basis and worker can reject or opt out of assignments.
Workers complete assignments using their own methods and work process.
Tools, equipment and supplies are provided by the worker although the company may provide some training.
Workers may provide and be paid for their services to others
Why do some employers misclassify intentionally?
Honestly, they think it will be cheaper … they’re not paying any matching portion of taxes on the employee. They’re not covering them on workers comp. They’re not paying any unemployment taxes. They’re not paying overtime. They’re not paying any benefits on the employee. Less Record Keeping.
Unfortunately, it is illegal. Listed below are some of the fines, fees, penalties, and repercussions of misclassifying that you and your business may be responsible for:
3 year Audit of business records
$100 fine per worker …. And much, much more if this misclassification was intentional or fraudulent
Paying your share of the uncollected FICA
Paying 40% of the FICA your worker should have paid
1.5% penalty fee (plus interest) of the worker’s wages in which you failed to withhold federal income taxes and forward onto the government.
Similar consequences from State agencies for failure to withhold and pay taxes
Consequences for not paying Unemployment taxes to both the State & Federal Governments.
All of these fines can be backdated for up to three years per worker.
The actual workers that were misclassified may come back after you for unpaid overtime and other benefits.
Fraudulent Misclassification could result in much heavier fines, penalties, and prison.
Misclassification lawsuits (ie Microsoft $96.9 Million; Time Warner $5.5 Million; Fed Ex $240 Million; So-Cal Port Truckers $5 Million; J&A Services $16,000)
What sectors has the most misclassifications?
It’s a common tactic in all employment sectors, but it’s more widespread with the Construction and Staffing Industries.
How can an employer be caught misclassifying?
There are many ways an employer can be caught:
Worker could call Wage and Hour Division/FSLA/DOL and/or EEOC,
Worker could file for unemployment
Worker is injured on the job and tries to file a workers comp claim
Workers Comp Division could discover in an Audit
A Workers Comp investigator could visit a job site
IRS could discover during an audit on either your tax returns or the individual’s tax return
Department of Labor could discover during an audit
A state agency could discover during a routine audit
Compliance really does matter. Independent Contractors are beneficial to some businesses, but in order to be truly beneficial the worker must be within the guidelines set forth by the Government Agencies.
A quality PEO, like AccessPoint, can assist your business in this area of compliance along with other areas. AccessPoint has the breadth of experience and the depth of expertise that businesses need to be guided in a clear and concise direction for HR situations.
Please contact myself, Denise Perchall at 239.980.1065 or firstname.lastname@example.org for a free PEO proposal and Cost Comparison.