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The responsibility for ensuring the proper classification of 1099 Independent Contractors utilized by a company has always fallen on the employer. However, now more than ever, it is important that employers take a closer look at their independent contractors. Why? Because the U.S. government by way of the IRS and the Department of Labor are beginning to heavily scrutinize employers and hold them accountable by knocking on doors, conducting more audits, and seeking billions of dollars from employers due to misclassifications.
In March 2010, the IRS and the Department of Labor made a serious commitment to crack down on the misclassification of 1099 independent contractors. The IRS even ramped up this effort by hiring 4,500 additional agents announcing they will conduct thousands of employment tax audits while the Department of Labor hired hundreds of investigators for support.
You may recall companies like FedEx and Microsoft that who have faced stiff fines for independent contractor misclassification. An IRS investigation determined that FedEx owed approximately $319 million in back taxes for 2002 over the misclassification issue. Microsoft found itself in a similar situation eventually complying with payment of employment taxes on behalf of workers who had been misclassified as 1099 Independent Contractors for a specified tax period. Microsoft also later settled for $97 million for the value of benefits denied to those independent contractors who were later converted to employees.
The Telecom telecom industry, with its more than one 1 million employees working in wired, wireless, satellite and other sectors has traditionally been a heavy user of 1099’s 1099s. How can you avoid a FedEx or Microsoft-like catastrophe? The rules governing which workers can truly be considered “independent” are very strict; but, there are some guidelines provided by the IRS to help your company avoid stiff fines and penalties.
First, there is a 20- point questionnaire that you can ask yourself about an independent contractor working for you:
1. Is the individual required to work set hours?
2. Is training provided to the individual by your company?
3. Is the success of your business somewhat dependent on the type of service provided by the individual?
4. Does the individual have to personally perform the contracted services?
5. Must the individual work full time at your company?
6. Is there an ongoing relationship between your company and the individual?
7. Does the individual have to take instructions from your company’s managers regarding the manner and means of employment? (i.e. when, where and how the work is to be done?)
8. Have you supplied assistance to the work in completing the project stated in the contract?
9. Is the work performed on company premises?
10. Does the individual have to follow a set sequence or routine in the performance of his work?
11. Does the individual have to give you reports regarding his/her work?
12. Is the individual paid by the hour, week or month?
13. Is the individual reimbursed for business/travel expenses?
14. Is the individual supplied with tools or materials by your company?
15. Have you made a significant investment in facilities used by the individuals to perform his/her services?
16. Is the individual free from suffering a loss or realizing a profit based on his work?
17. Does the individual limit the availability of his services to the general public?
18. Does the individual perform services for other companies?
19. Do you have the right to discharge the individual?
20. May the individual terminate his services at any time?
If you answer “No” to questions 1-16 and “Yes” to questions 17-20, chances are you have a valid independent contractor on your hands. Here’s the kicker. A simple majority of “No” answers to questions 1-16 and “Yes” answers to questions 17-20 does not guarantee your worker is validated through independent contractor status. However, each employer should conduct this ‘test’ for each independent contractor and make the logical determination if each is a legitimate 1099. If they are, file your results and justification away in their employee file so you can be ready if the IRS knocks at your door. If they are not, as the employer, it is your responsibility to either convert the 1099 to a W-2 or utilize an outside staffing service to take that employee on as a contract employee.
If it is still unclear after you answer the 20- point questionnaire, you can engage an employment law attorney to help you make the determination or, as a last resort, you can complete an SS-8 form and ask the IRS to make that determination for you. Form SS-8 can be found on IRS.gov and can be filed with the IRS for the determination of worker status for purposes of federal employment taxes and income tax withholding. Either the employer or the worker can complete the form.
Pop Quiz—Let’s imagine you have an independent contractor named John Doe. John was hired by POTS Company to install a cable line for a residential community called The Oaks. With 25 years experience in the industry, this project is second nature to John. He has his own equipment and knows the job needs to be done by November Nov. 5. John calls the shots of when he works on this project and sometimes brings in his own workers to help with the job. Is John classified correctly as a 1099?
Yes, he is. But, consider for a moment if POTS Company was so pleased with John’s work at The Oaks, they asked him to work on the cable installation of the next two residential communities—a much larger project. POTS Company has asked John to work along with their larger crew on this project and utilize their fleet of trucks as necessary for the project. POTS Company also said they would like to provide John with a new set of Linesman’s pliers to show their appreciation for his hard work and to help in the next two projects. Under these circumstances, John would not be a valid 1099 because the relationship between John and POTS Company is ongoing and because POTS Company has provided tools/equipment for the project. As the employer, it would be your responsibility to either convert him to a W-2 or utilize an outside staffing service to take him on as a contract employee. In this case, the implications for not making that conversion could be stiff for the employer and John including fines, incarceration, and/or a stop work order.
Unfortunately, without an SS-8 form and official determination from the IRS, the guidelines for 1099 independent contractor classification aren’t always clear. However, with the recent efforts of the federal government, the consequences for misclassification are becoming crystal. Before your company finds itself in a financial disaster over independent contractors, go through the 20-point questionnaire for each independent contractor, seek feedback from an employment lawyer and/or the IRS if necessary and make sure your independent contractors are classified correctly.
Founded in 1945, Allstates Technical Services, LLC is a full service staffing company providing project and technology-driving companies with contract, contract-to-hire, direct placement, vendor management and payrolling services. Allstates has approximately 1,000 contract technical personnel working throughout the U.S. For more information, visit www.asts.net.
Allstates Technical Services, LLC is a subsidiary
of KBR, Inc.
KBR is a global engineering, construction and servic
es company supporting the energy, hydrocarbon, government services, minerals, civil infrastructure, power and industrial markets. For more information, visit www.kbr.com.
Andrea Hopkey has served as president of Allstates Technical Services since 2004. Andrea joined ViaTech Services, a precursor to the present Allstates organization, in 1994. She has contributed to all aspects of the Allstates business over the years having served in various roles ranging from Technical Recruiter to Director of Corporate Development.