One of the most egregious misclassifications I see frequently in our industry is the 1099 "employee". The fact that I hear many refer to their independent contractors as 1099 employees is a true tell that these employers are getting it wrong. You're either an independent contractor or you're an employee. These two classifications aren't intended to be blended.
Here are the three common law rule categories you should look at:
- Behavioral. Does the company control or have the right to control what the worker does and how the worker does his or her job? Do they have freedom in determining how their tasks are performed? Do they wear a company uniform? Are they free to explore other contracts/jobs? Is the person given training?
- Financial. Are the business aspects of the worker's job controlled by the payer? Are they providing their own supplies? Paying for their own liability insurance? Are business expenses being reimbursed?
- Type of Relationship. Are there written contracts or employee type benefits? Will the relationship continue and is the work performed a key aspect of the business? Is the relationship going to be short-lived or a one time project? Is the position one that the business requires permanently? Is the business proving health insurance, a retirement plan, or PTO?
The IRS wants its money.
Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. The IRS frowns heavily upon 1099ing someone to get around these taxes. Well, they do more than frown. They fine. Heavily. This is serious stuff. Along with penalties, an employer would be held liable for all the employment taxes of the misclassified employee. Suits have totaled in the hundreds of thousands to millions for businesses in violation (Orange County Register, FedEx, etc.).
The IRS says, "Businesses must weigh all factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no "magic" or set number of factors that "makes" the worker an employee or an independent contract, and no one factor stands alone in making this determinations. Also, factors which are relevant in one situation may not be relevant in another." Clear as mud, right?
The simple answer. A duck.
After going through a full review of what the person does and how they do it, you still may be left scratching your head. Here's a simple way to approach the issue: If it walks like a duck and quacks like a duck, it's a duck. Or in this instance, if the position requires the person to be directed as to how, when, where and with what to do the job, you have yourself an employee. Fill out that W4 and file those taxes!