The IRS has realized the large sums of potential tax revenue they are losing due to misclassified 1099 independent consultants who should legally be W-2 employees. When a company pays a consultant on a 1099-misc form, they avoid the following: federal and state tax withholdings, deposits and reports, the employer's share of Social Security and Medicare taxes, state and federal unemployment insurance premiums, state disability insurance premiums, Workers' Compensation costs, fringe benefits, vicarious liability for employee negligence, and EEOC regulations. The IRS estimates that it loses from $4 to $20 billion per year in unpaid taxes as a result of this misclassification problem.
With the added pressure of additional revenue needed at the federal and state level, understandably, the IRS and many states have made it a priority to investigate 1099-misc forms that are turned in at the end of the tax year. In addition, a bill, The Employee Misclassification Prevention Act would amend the Fair Labor Standards Act, has been introduced in the congress which will create additional oversight for auditing and additional penalties for non-compliance.
Make sure you are safe. Below is a 20 point checklist used by the IRS and legal system to determine classification.
If there is a chance that your use of consultants falls within this misclassification, don’t take the risk in today’s environment. You still have the ability to bring individuals on in an hourly fashion legally, by contracting them through a staffing organization. They become w-2 employees of our organization and can legally work for your organization on a contract basis as they are no longer paid an a 1099-misc form.
IRS 20 Point Checklist for 1099 Workers
Specific factors that are used by the IRS in determining whether an individual is an employee (W-2) or an independent contractor (1099) are listed below. This listing is commonly referred to as the "20 factors" test. This 20-point checklist is only a guideline; it does not guarantee that a person is correctly classified. Most agencies and courts typically look to the totality of the circumstances and balance the factors to determine whether a worker is an employee.
1. Must the individual take instructions from your management staff regarding when, where, and how work is to be done? A worker who is required to comply with other persons' instructions about when, where, and how he or she is to work is ordinarily an employee. This control factor is present if the person or persons for whom the services are performed have the right to require compliance with instructions.
2. Does the individual receive training from your company? Training a worker by requiring an experienced employee to work with the worker, by corresponding with the worker, by requiring the worker to attend meetings, or by using other methods, indicates that the person or persons for whom the services are performed want the services performed in a particular method or manner.
3. Is the success or continuation of your business somewhat dependent on the type of service provided by the individual? Integration of the worker's services into the business operation generally shows that the worker is subject to direction and control. When the success or continuation of a business depends to an appreciable degree upon the performance of certain services, the workers who perform those services must necessarily be subject to a certain amount of control by the owner of the business.
4. Must the individual personally perform the contracted services? If the services must be rendered personally presumably the person or persons for whom the services are performed are interested in the methods used to accomplish the work as well as in the result.
5. Have you hired, supervised, or paid individuals to assist the worker in completing the project stated in the contract? If the person or persons for whom the services are performed hire, supervise, and pay assistants, that factor generally shows control over the workers on the job. However, if one worker hired supervises, and pays the other assistant pursuant to a contract under which the worker agrees to provide materials and labor and under which the worker is responsible only for the attainment of a result, this factor indicates an independent contractor status.
6. Is there a continuing relationship between your company and the individual? A continuing relationship between the worker and the person or persons for whom the services are performed indicates that an employer-employee relationship exists. A continuing relationship may exist where work is performed at frequently recurring although irregular intervals.
7. Must the individual work set hours? The establishment of set hours of work by the person or persons for whom the services are performed is a factor indicating control.
8. Is the individual required to work full time at your company? If the worker must devote substantially full time to the business of the person or persons for whom the services are performed, such person or persons have control over the amount of time the worker spends working and impliedly restrict the worker from doing other gainful work. An independent contractor, on the other hand, is free to work when and for whom he or she chooses.
9. Is the work performed on company premises? If the work is performed on the premises of the person or persons for whom the services are performed, that factor suggests control over the worker, especially if the work could be done elsewhere.
10. Is the individual required to follow a set sequence or routine in the performance of his work? If a worker must perform services in the order or sequence set by the person or persons for whom the services are performed, that factor shows that the worker is not free to follow the worker's own pattern of work but must follow the established routines and schedules of the person or persons for whom the services are performed. Often, because of the nature of an occupation, the person or persons for whom the services are being performed do not set the order of the services or set the order infrequently. It is sufficient to show control, however, if such person or persons retain the right to do so.
11. Must the individual give you reports regarding his/her work? A requirement that the worker submit regular or written reports to the person or persons for whom the services are performed indicates a degree of control.
12. Is the individual paid by the hour, week, or month? Payment by the hour, week, or month generally points to an employer-employee relationship, provided that this method of payment is not just a convenient way of paying a lump sum agreed upon as the cost of a job. Payment made by the job or on a straight commission generally indicates that the worker is an independent contractor.
13. Do you reimburse the individual for business/travel expenses? If the person or persons for whom the services are performed ordinarily pay the worker's business and/or traveling expenses, the worker is ordinarily an employee. An employer, to be able to control expenses, generally retains the right to regulate and direct the worker's business activities.
14. Do you supply the individual with needed tools or materials? The fact that the person or persons for whom the services are performed furnish significant tools, materials, and other equipment tends to show the existence of an employer-employee relationship.
15. Have you made a significant investment in facilities used by the individual to perform services? If the worker invests in facilities that are used by the worker in performing services and are not typically maintained by employees (such as the maintenance of an office rented at fair value from an unrelated party), that factor tends to indicate that the worker is an independent contractor. On the other hand, lack of investment in facilities indicates dependence on the person or persons for whom the services are performed for such facilities and, accordingly, the existence of an employer-employee relationship.
16. Is the individual free from suffering a loss or realizing a profit based on his work? A worker who can realize a profit or suffer a loss as a result of the worker's services (in addition to the profit or loss ordinarily realized by employees) is generally an independent contractor, but the worker who cannot is an employee.
17. Does the individual only perform services for your company? If a worker performs services for a multiple of unrelated persons or firms at the same time, that factor generally indicates that the worker is an independent contractor.
18. Does the individual limit the availability of his services to the general public? The fact that a worker makes his or her services available to the general public on a regular and consistent basis +indicates an independent contractor relationship.
19. Do you have the right to discharge the individual? The right to discharge a worker is a factor indicating that the worker is an employee and the person possessing the right is an employer. An employer exercises control through the threat of dismissal, which causes the worker to obey the employer's instructions. An independent contractor, on the other hand, cannot be fired so long as the independent contractor produces a result that meets the contract specifications.
20. May the individual terminate his services at any time? If the worker has the right to end his or her relationship with the person for whom the services are performed at any time he or she wishes without incurring liability, that factor indicates an employer-employee relationship.
NOTICE: Management Recruiters of Vancouver has provided the content of this document for general informational purposes only. You should not substitute this information for personal consultation with a qualified professional in the field, nor should you rely upon this information in taking any action. No attorney-client relationship will be created through your use of this document.
What Recruiting Will Look Like After the Recession
by Kevin Wheeler
This is a strange recession.
It is not affecting employment across the board as many of the past ones have, but rather seems to be targeting specific sectors and types of work. Obviously banking and financial services, but also manufacturing and anyone in a semi-skilled job such as auto workers are especially affected. Needs are pocketed and specific. Talent shortages remain.
Yet, I have had calls from search firms looking for key sales and marketing people, and for R&D talent. Senior HR executives are in demand, especially if they have global experience. Sectors still largely unscathed by the recession – healthcare, gaming, entertainment, pharmaceuticals, and biotech – are still facing talent shortages and global competition.
The growth of global supply chains, increasing automation, and greater process efficiency means we can do more with fewer. New jobs are being created daily, but they all require education and skill beyond that of many current candidates.
This, combined with the different attitudes candidates and employees have about work and about how they live their lives, changes how we recruit and employ people.
The highly skilled, experienced, and educated will have an increasing edge in employment. And this recession should be a clarion call for an increased focus on education, training, and employment development. Everyone involved with talent will need to look at both development and acquisition as channels to meet their needs, rather than focus entirely on recruiting.
There are a number of permanent changes we will see.
Candidates Become Smarter, Warier
The first change is that many candidates will be reluctant to work under the same conditions as usual. Candidates have access to unparalleled information about a prospective employer through the Internet and its many sources. Reliance on a single firm for security has already eroded, and this recession will strengthen employees’ wariness about promises and deferred compensation. More top employees will seek employment contracts that include clauses that spell out layoff pay and benefits.
Candidates will probe positions more deeply and they will want more influence over the type of work they do. Prepare for candidates to negotiate what they will and won’t do.
Free Agency
Recessions have, in the past, increased the pool of people who decide to become free agents – contractors, consultants, and part-time workers. More people than ever are trying out life as independent workers. Many will not make it and return to the corporate fold, but they will be wiser and better prepared to abandon ship than they were before.
Many others will find they would rather work on their own than go back under the very insecure and fragile corporate umbrella. Companies will have to identify and take care of their key producers better than ever. While many firms do work hard to keep key talent, they will have to increase this effort and explore more creative ways to engage those people.
Charles Handy, a management writer and educator who has written numerous books on the organizations of the future, predicted that up to half of some company’s talent may eventually work as free agent, contracting to those firms as temporary staff, contractors, or part-timers. This will be a lasting change that is accelerated because of the recession.
Recruiters and HR staff will have to accommodate these free agents. Our internal regulations will have to be modified to make the use of contractors legal and compliant with IRS regulations and it may be necessary to lease employees, employ more employment contracts, and learn to share talent between organizations.
These changes will be fought by the legal department and more HR leaders, yet I believe companies will eventually have to embrace these ideas to be competitive.
Values Rule
Gen Y candidates, in particular, but all employees to a growing degree, are seeking companies that hold values high and make and keep commitments to their employees and their families. They seek environmentally sensitive, charitable, and ethical firms.
Gen Y is the tip of a spear followed by the even more morally and environmentally committed Gen M. They will have even higher expectations than the Baby Boomers ever did. While shareholder value will always be a core concern of the management team, they will also have to understand how important employees feel that values are and how close a scrutiny they will give every corporate action and statement.
Recruiters have to understand the values of the firms they work for and find better ways to match people to those values. They will have to also convince the management of firms that what they DO is just as important as what they say and that this emerging candidate pool focuses on actions almost entirely.
Flexible Work Arrangements
Employees now want to work where they want. The Internet has made it possible for most services and knowledge workers to be located far away from the physical center of their company.
Designers, call-center staff, sales people, some HR folks, and most anyone who works with information, writing, or data can effectively work wherever they wish. Only a handful of people – those whose work requires their hands or eyes on the work being produced – will need to physically be present. Even jobs we cannot yet imagine being remote, such as that of a diagnostic physician, may soon be possible using instruments and video from anywhere.
Recruiters will need to encourage flexible work arrangements and lobby with hiring managers to make these arrangements normal.
Recruiting will be more challenging and those recruiters who like to “fill positions” will find themselves looking for other kinds of work. Recruiters will need to be proactive, great influences, technically savvy, and adaptable to emerging work trends.
This is a strange recession.
It is not affecting employment across the board as many of the past ones have, but rather seems to be targeting specific sectors and types of work. Obviously banking and financial services, but also manufacturing and anyone in a semi-skilled job such as auto workers are especially affected. Needs are pocketed and specific. Talent shortages remain.
Yet, I have had calls from search firms looking for key sales and marketing people, and for R&D talent. Senior HR executives are in demand, especially if they have global experience. Sectors still largely unscathed by the recession – healthcare, gaming, entertainment, pharmaceuticals, and biotech – are still facing talent shortages and global competition.
The growth of global supply chains, increasing automation, and greater process efficiency means we can do more with fewer. New jobs are being created daily, but they all require education and skill beyond that of many current candidates.
This, combined with the different attitudes candidates and employees have about work and about how they live their lives, changes how we recruit and employ people.
The highly skilled, experienced, and educated will have an increasing edge in employment. And this recession should be a clarion call for an increased focus on education, training, and employment development. Everyone involved with talent will need to look at both development and acquisition as channels to meet their needs, rather than focus entirely on recruiting.
There are a number of permanent changes we will see.
Candidates Become Smarter, Warier
The first change is that many candidates will be reluctant to work under the same conditions as usual. Candidates have access to unparalleled information about a prospective employer through the Internet and its many sources. Reliance on a single firm for security has already eroded, and this recession will strengthen employees’ wariness about promises and deferred compensation. More top employees will seek employment contracts that include clauses that spell out layoff pay and benefits.
Candidates will probe positions more deeply and they will want more influence over the type of work they do. Prepare for candidates to negotiate what they will and won’t do.
Free Agency
Recessions have, in the past, increased the pool of people who decide to become free agents – contractors, consultants, and part-time workers. More people than ever are trying out life as independent workers. Many will not make it and return to the corporate fold, but they will be wiser and better prepared to abandon ship than they were before.
Many others will find they would rather work on their own than go back under the very insecure and fragile corporate umbrella. Companies will have to identify and take care of their key producers better than ever. While many firms do work hard to keep key talent, they will have to increase this effort and explore more creative ways to engage those people.
Charles Handy, a management writer and educator who has written numerous books on the organizations of the future, predicted that up to half of some company’s talent may eventually work as free agent, contracting to those firms as temporary staff, contractors, or part-timers. This will be a lasting change that is accelerated because of the recession.
Recruiters and HR staff will have to accommodate these free agents. Our internal regulations will have to be modified to make the use of contractors legal and compliant with IRS regulations and it may be necessary to lease employees, employ more employment contracts, and learn to share talent between organizations.
These changes will be fought by the legal department and more HR leaders, yet I believe companies will eventually have to embrace these ideas to be competitive.
Values Rule
Gen Y candidates, in particular, but all employees to a growing degree, are seeking companies that hold values high and make and keep commitments to their employees and their families. They seek environmentally sensitive, charitable, and ethical firms.
Gen Y is the tip of a spear followed by the even more morally and environmentally committed Gen M. They will have even higher expectations than the Baby Boomers ever did. While shareholder value will always be a core concern of the management team, they will also have to understand how important employees feel that values are and how close a scrutiny they will give every corporate action and statement.
Recruiters have to understand the values of the firms they work for and find better ways to match people to those values. They will have to also convince the management of firms that what they DO is just as important as what they say and that this emerging candidate pool focuses on actions almost entirely.
Flexible Work Arrangements
Employees now want to work where they want. The Internet has made it possible for most services and knowledge workers to be located far away from the physical center of their company.
Designers, call-center staff, sales people, some HR folks, and most anyone who works with information, writing, or data can effectively work wherever they wish. Only a handful of people – those whose work requires their hands or eyes on the work being produced – will need to physically be present. Even jobs we cannot yet imagine being remote, such as that of a diagnostic physician, may soon be possible using instruments and video from anywhere.
Recruiters will need to encourage flexible work arrangements and lobby with hiring managers to make these arrangements normal.
Recruiting will be more challenging and those recruiters who like to “fill positions” will find themselves looking for other kinds of work. Recruiters will need to be proactive, great influences, technically savvy, and adaptable to emerging work trends.
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