1099 or W-2
“Just make them an independent contractor if you don’t like withholding taxes.”
“All my employees are contractors.”
“Contractors are cheaper. That’s why all my people are contractors instead of employees.”
I can’t tell you how many times I’ve heard all the above, or some variation or combination thereof. For those who are totally in the dark, a “1099” is shorthand for someone who fills out Form 1099 instead of a W-2, come tax time. In other words, a 1099 is an independent contractor instead of an employee. The withholding and benefits requirements for 1099 contractors are different from those for W-2 employees. And while it’s true that 1099 contractors receive different tax treatment, it is absolutely untrue that one can simply decide whether to treat an employee as a contractor.
You see, whether someone is an independent contractor or an employee is a legal determination based on the circumstances of their engagement with the firm they work with. It has nothing to do, or at least very little to do, with how their firm has decided to label them. There are hundreds, if not thousands of reported cases elucidating the different circumstances of contractors and employees.
There are a few central determining factors at play. They are:
Does the firm control what the employee/contractor does and how he or she does it?
Does the firm control the business aspects of the employee/contractor’s role, like how he or she gets paid?
Does the firm control and provide the tools and supplies required to do the job?
Does the firm provide vacation benefits, sick time, pension plans, or other benefits typically found in an employer/employee relationship?
Is the relationship between the firm and employee/contractor a central and crucial part of the employee/contractor’s “business?”
If the answers to most or all of these questions is “yes,” then you have an employee/employer relationship with the person, not a contracting arrangement. If the answer to most or all of these questions is “no,” you likely have a contractor on your hands. Out of all of them, the most important question is the first one. Namely, who has the right to control the person’s work and how he or she does it? When the answer to that question is “the firm,” it’s very unlikely that you have a contractual arrangement.
Where it gets confusing, and where you can use the help of a lawyer specializing in employment or tax law, is where the answers to some questions are “yes,” and others “no.” At that point, a court or a tax authority would do a deep dive into the circumstances of the employee/contractor to determine which category he or she fit into.
Whatever you do, don’t simply “decide,” based on nothing more than what is financially convenient for you, whether your people are employees or contractors. Do an honest assessment of their circumstances and assign them the label that makes the most sense. If their situation is ambiguous, try to change those circumstances to bring them more into line with one category or the other.
If you’d like more information about who qualifies as a contractor and who qualifies as an employee, don’t hesitate to contact us with the form below. We’d love to help!