Record high inflation coupled with low unemployment creates a tough recipe for business owners trying to hire. Many have considered options like hiring teens or enhancing their benefits package to attract more applicants. But what about an alternative solution like paying someone as a 1099 contractor?
Today’s gig economy makes it easy to find a professional to tackle just about any task, which would also save on taxes, benefits, and other costs associated with employees. However, there are limitations on who can be considered a contractor.
When wondering whether your job could be paid as a 1099 contractor instead of an employee, consider these three categories established by the IRS:
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does their job?
- Financial: Are the business aspects of the worker’s job controlled by the payer? This includes things like how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.
- Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
Collectively, these factors determine whether a worker is an independent contractor or an employee. While no single factor can be weighed more heavily than others, the idea is to look at the entire relationship to find “the extent of the right to direct and control the worker.” The less control the worker has, the more likely they’re an employee.
Could an auto mechanic, truck driver, engineer, cleaner, or construction worker be an independent contractor?
Every company varies with how they assign work, so you’ll need to refer to the IRS categories listed above to determine the relationship. If you’re still scratching your head, refer to Form SS-8 for IRS determination of status. Samples of questions included on this form are:
- Did the worker obtain the job by applying for or bidding on it?
- Do they get paid by the hour, piece rate, salary, or some other form of wage, or do they invoice for their work?
- What was the work done by the worker and their job title?
- Were they given any specific training or instruction on how to do the job?
- Who does the worker contact if there are problems or complaints, and who is responsible for their resolution?
- Is there a certain schedule or expected hours to work?
- Does the worker have to attend any meetings?
- If the worker hires substitutes or helpers, is approval required? Who pays them?
- Who provides the tools, equipment, and other required materials?
- Does the worker have their own workers’ compensation?
- What economic loss or financial risk can the worker incur beyond normal loss of wages, such as damage of equipment or materials?
- Can the relationship be terminated by either party without incurring liability or penalty?
- Does the worker do any advertising for their services?
- If the worker no longer performs services, how did it end? (e.g., worker quit or was fired, job was completed, contract ended, etc.)
- Does the worker solicit new customers?
- Who determines the worker’s territory?
While this list is not all-inclusive for determining work status, it should help you more clearly outline the nature of the relationship. The more responsibility and liability the worker has, the more likely it’s a 1099 contractor.
Unfortunately, many employers get stuck mimicking business practices of comparable businesses simply because “that’s the way it’s always been done.” Do your due diligence and learn whether the jobs you’re wanting to pay as independent contractors genuinely qualify.