NOT TRUE. An IRS Form 1099-MISC is simply a method the government uses to track and report certain types of nonemployment income. When you provide an IRS Form 1099-MISC to a worker for payment of services, it does not automatically make the worker an independent contractor.
NOT TRUE. The amount paid to a worker is not, by itself, a factor in determining whether a worker is an employee or an independent contractor. The amount paid to a worker may determine if you should issue an IRS Form 1099-MISC. For information on the federal requirements, access the IRS Web site at www.irs.gov or contact the IRS at (800) 829-1040.
NOT TRUE. An employee may perform services on a less than full-time permanent basis. The law does not exclude services from employment that are commonly referred to as day labor, part-time help, casual labor, temporary help, probationary, or outside labor.
NOT TRUE. Family members working for your business are employees and subject to California payroll taxes unless certain conditions are met.
NOT TRUE. A written contract or agreement does not necessarily depict the actual relationship. The actual practices of the parties in a relationship are more important than the wording of an agreement in determining whether a worker is an employee or an independent contractor.
NOT TRUE. The law defines employment relationships, not you or the actions of your competitors. If you misclassify your workers as independent contractors, [you may be assessed] for the unpaid payroll taxes for any unreported employees.
NOT TRUE. Performing similar work for other businesses is not, by itself, a determining factor. The relationship the worker may have with the other businesses is not a controlling factor when determining the worker's status as an employee or independent contractor with your business. The working relationship with each business is looked at separately.
NOT TRUE. A city business license and business card, by themselves, do not make a worker an independent contractor. All of the common law factors need to be reviewed and weighed with respect to the specific circumstances of the services provided by each worker.
NOT TRUE. The method of payment is not, by itself, a determining factor. All of the common law factors need to be considered and weighed to determine whether a worker is an employee. If the worker is an employee, then all remuneration for services (salary, hourly pay, piece rate, commissions, bonuses, stock options, vehicle, etc.) is wages.
Lifecycle management company Corporate United reports that "In a survey by Staffing Industry Analysts of companies in various industries with 1,000 or more employees, fewer than 1 in 5 respondents said they are sure that their independent contractors (IC) are properly classified". It's this lack of knowledge that places employers at risk for fines when an audit turns up these costly misclassification mistakes. The IRS may not be aware that an organization has contractors that should be deemed employees, but all it takes is an unemployment or workers compensation filing as the trigger that sets an audit in motion.
In the end, though state guidelines may vary slightly from federal when it comes to classification, the overall burden is on the employer to ensure they have their workers classified correctly. Corporate United explains in a recent article that "the financial penalties alone can amount to up to 40 percent of the individual's compensation...and the reality is the government is counting on those misclassification cases to raise funds. State and federal agencies are stepping up their enforcement activities and cracking down with penalties fees. Internal Revenue Services (IRS) penalties can hit a company hard, especially when you consider there is a three-year look-back period on any misclassified workers."
"It's not just the IRS employers have to worry about", states Corporate United, "it's more common today for ex-contractors to sue their previous employers for denial of benefits, stock options or compensation such as overtime pay. A classic case is Vizcaino v. Microsoft, a $97 million settlement that favored long-time contractors who demanded equal benefits. These "perma-temps" were misclassified as independent contractors, and they worked alongside Microsoft employees who were making millions on stock options. The contractors wanted their piece of the pie, and so they retroactively sued--and won."
Though the penalties can be hefty, independent contractors that are rightly classified bring a necessary value to many corporations and caution should be taken when hiring. A new trend for cash-strapped companies and start-ups is to offer stock options to contractors, bringing with this concept new risks for potential litigation. Step one: find a good lawyer.
About the Author, David Webb
David is the CEO of BrightMove and is a seasoned technology executive & entrepreneur noted for creating successful businesses. Over his 25+ year career, David has developed multi-platform expertise in the domains of computer science, data analytics & business transformation. Starting in 1995, David worked with his best friend, Jimmy Hurff, to develop one of the world's first Internet job board and resume bank applications. David is the primary architect of BrightMove and has an active role in the product's evolution to this day. From then to now, David has been consistently helping his customers to build great teams, using best practices and world-class technology.