The Independent Contractor Dilemma: 1099 vs. W-2

The Independent Contractor Dilemma: 1099 Vs. W-2

The Misclassification Initiative

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:

  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?
  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
  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?

Resources

For more information on how to determine classification, see IRS Independent Contractor or Employee brochure. If you are not sure how to classify a worker, get Form SS-8 Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. Publication 15-A Employer’s Supplemental Tax Guide provides additional information on independent contractor status. If you have further questions or concerns beyond these documents, please consult an attorney.

Sources

IRS Independent Contractor or Employee? IRS Form SS-8 - Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding Publication 15-A (2013), Employer’s Supplemental Tax Guide

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