Taking the Guess Work Out of 1099s

Written by: Lorrie Coffey, Horizon Point Consulting

In fifteen years as an HR practitioner, there’s one question I can probably pinpoint as the most asked question I have gotten over the years.

“Why can’t I just classify them as an independent contractor?”

It’s estimated that by 2020 40% of the US workforce will be freelancers or temp employees, up from 30% in 2006. With that number growing, it’s even more important for organizations to understand the independent contractor classification and when it can be used. The penalties for misclassifying employees as independent contractors can include back payment of taxes, interest owed to employees for wages not paid, fines, and even criminal or civil charges. It’s a costly mistake, and yet it’s one I see way too often.

Here are just a couple questions I’ve answered in the last few weeks alone:

  1. “I have a candidate that would like to be classified as a 1099, can I do that?” Simply put, no, you cannot classify someone as an independent contractor just because that’s how they prefer to be classified.
  2. “We have a candidate that we want to bring on as an employee, but we’d like them to complete a trial period. Can we classify them as an independent contractor during that trial period and then hire them as an employee at the end of that period if they are a good fit for the position?” No, you cannot temporarily bring someone on as an independent contractor to see if they’re a good fit for your company if you’re otherwise going to treat them as you would any other employee. You can certainly have a probationary or trial period during which time you evaluate them and they get to evaluate the company, but you have to pay them as you would any other employee.

So when can an organization pay someone as an independent contractor? Here are a few questions to ask yourself about the assignment:

  1. How will the work be assigned and completed? Will regular direction be given or will an overall scope of work be provided? Who will dictate the work schedule? Where will the work be completed? If there will be regular direction given or delegation of tasks to which specific deadlines are set and the company dictates when and where the work is to be performed, chances are they should not be classified as an independent contractor. If an overall scope of work is agreed upon and they determine their own work schedule and where the work is completed, then move on to the next question.
  2. Who will provide the necessary resources to complete the work? Will the company provide necessary equipment such as computers, phones, etc.? If the company will be providing the necessary resources and equipment, there is a strong chance the position does not qualify as an independent contractor. There are some exceptions to this, for example, they provide their own computer, but the company provides them with access to software programs required to complete the work.
  3. How will they be compensated for the work completed? If they are paid as any other employee of the company, chances are they should not be classified as an independent contractor. If they are paid a set contract amount, even if paid in equal intervals such as monthly, or they provide an invoice for work completed that is then paid through accounts payable, it is possible that they are in fact an independent contractor.

For more detailed information on evaluating the independent contractor classification, you can go to the IRS website. Many years ago the IRS designed a 20-Factor Test for Independent Contractors. They no longer support the test on their website, but it’s still floating around out there and I still recommend it to clients as the best source for helping to determine 1099 status. The information on the IRS website is not as clearly defined in my opinion as the test is.

I recommend that if your organization currently has independent contractors, you check their status against the 20-Factor test. If the position does not meet the requirements of the test, proactively take action to remedy the error and classify them correctly as an employee and ensure that they are afforded all of the benefits that an employee receives.

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