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January, 2013

The Independent Contractor Dilemma: 1099 vs. W-2

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The Independent Contractor Dilemma: 1099 vs. W-2

The Department of Labor (DOL) and state investigators are cracking down on employers who misclassify employees. In an effort to curb misclassification, the DOL has hired 100 new auditors solely to investigate the correct status of independent contractors.

With their new Misclassification Initiative, the IRS plans to flag employers for audit should they issue both a form 1099 and form W-2 to the same identification number. In addition, the IRS, in its attempt to minimize the “tax gap”, has also begun a coordinated effort of enforcement by sharing information with the DOL and the States.

Determining Classification

Now more than ever, it’s imperative that you are in compliance with the law when classifying independent contractors. According to the IRS Independent Contractor or Employee brochure, here are the steps necessary to determine classification:

Behavioral Control

1. Behavioral Control

Is the employer providing extensive instructions on how, when, and where work is to be done or what tools or equipment to use?

Financial Controls

2. Financial Control

Are the business aspects of the worker’s job controlled by the payer? For example, whether expenses are reimbursed or who provides tools/supplies?

Relationship of the Parties

3. Relationship of the parties

Are there written contracts or employee type benefits, such as a pension plan or insurance? Will the relationship continue and is the work performed a key aspect of the business?

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