1099s in Your Business

When Barbara Business Owner was looking to expand her team to support her growing business, she started to delve into the world of workforce options beyond the traditional full-time and part-time employees. There are independent contractors, contingent workers, and remote workers as part of the mix.

Now that she has a good understanding of the employer-employee relationship, she wants to consider the talent and flexibility of an independent contractor. However, she has recently learned that the employer-independent contractor relationship is more complicated than most businesses understand.

The most critical component to understand is that an independent contractor is not an employee, rather the employer is a client of the independent contractor. By using this lens, we begin to delve into 1099s in your business.

Who is a 1099 Worker?

A 1099 worker is a worker who completes specific tasks for business on a temporary basis. They are best hired for specific projects that benefit from their expertise and experience, and have ranging flexibility not afforded to employees.

This definition may appear straightforward, yet 1099 workers are the most commonly misunderstood workers. Let’s see what the IRS and US Department of Labor (DOL) have to say around what defines an independent contractor.

According to the IRS, an independent worker is a worker who operates as an independent business and offers their services to any employer who requires it. The hiring business has input as to the final result of a project performed by an independent contractor, but cannot dictate what will be done and how it is done. Independent Contractors do not have a traditional employer-employee relationship and they maintain several areas of control around how the service is performed.

The DOL relies on the Fair Labor Standards Act (FLSA) to define an independent contractor as someone who runs a business of their own, as opposed to an employee whose economic realities are dependent on their employer’s business.

The DOL considers several factors to define the employee vs 1099 worker status including how crucial the worker’s job is to the employer’s business, how long the worker has worked for the employer, how much of the job done is controlled by the employer and a few others. However, no single factor is considered more important than another in this situation.

Independent Contractors and Taxes

The most widely known aspect of independent contractors is that employers do not have to withhold and remit employment taxes to federal and local tax agencies. Independent contractors are responsible for submitting their own taxes – self-employment, social security contributions, and medicare taxes.

This can be very attractive to employers, so much so that it often comes as news to most businesses that employers may run into problems with the IRS and local authorities around their use of 1099 workers in their business.

Independent Contractors and Training

Employers are not mandated to train independent contractors, in fact doing so may resemble an employer-employee relationship that violates independent contractor criteria.  Businesses are free to offer training and materials but once the offer is presented as mandatory, an important line is crossed.

Independent Contractors and Benefits

Independent Contractors do not qualify for traditional benefits from an employer by federal or state laws. Conversely, employers who provide these benefits to 1099 workers run a risk of compliance infractions, as they’re now treating a contractor as an employee.

While hiring independent contractors can be an asset to many businesses, employers must stay aware of the layers of government regulations around which type of worker they can hire and when.

This is a complex and extensive subject that we will continue to cover in future articles. Contact us for a customized consultation on engaging the independent contractors and employees in your business.

ClearPath is a leading Human Resources Outsourcing company focusing on assisting employers to leverage the independent contractor labor market. We’re committed to helping business owners stay compliant and minimize the risks associated with their contingent labor requirements.

No Legal Advice Intended. This article includes general information about legal issues and developments in the law. Such materials are for informational purposes only and may not reflect the most current legal developments. These informational materials are not intended, and must not be taken, as legal advice on any particular set of facts or circumstances. You need to contact a lawyer licensed in your jurisdiction for advice on specific legal issues.