Most business owners are very well aware of the costs involved in hiring a new employee. After factoring in recruitment costs, employment taxes, various insurances, and benefits packages, the average employee costs much more than just their salaries. To save on some of these expenses, business owners or hiring managers may have gotten the advice or given some thought to hiring a “1099 employee” instead of a “normal” employee.

But what exactly is a 1099 employee?

Any employment professional will tell you that 1099 employees aren’t real. An employee receives a W-2, and their wages are subject to the various payroll taxes and withholdings. Eligible employees are also usually offered certain perks such as benefits packages, that might include healthcare coverage, flexible spending accounts, and access to company-sponsored retirement plans.  A “1099 worker” is typically an independent contractor or freelancer, which means the employer has no obligation to withhold income or FICA taxes from their pay. These workers generally do not have the same access to company-provided benefits and are responsible for their own tax planning and withholding.

How do I know if the worker is an employee or a contractor?

However, the decision to hire an independent contractor vs. an employee should be based on more than just the cost to the business. There are rules and guidelines set forth by the IRS that help businesses determine how to classify their workers. Some of the rules involve the degree of control over how the worker does their job, or how much financial control the employer has.

In an employee/employer relationship, the worker may be subject to the business’s instructions on when, where, and how to do the work. This can include dictating what tools or equipment to use, where to obtain supplies, and even providing specific training on how to do the job. Financial control factors that might determine whether a worker is an employee or independent contractor might include the possibility of the worker experiencing a loss due to unreimbursed expenses or significant investments in the tools and equipment needed to complete the job.

Perhaps one of the most helpful indicators to determine whether a worker is an independent contractor is the availability of the individual’s services to the market. Independent contractors are free to seek out other business opportunities and may have multiple clients who have hired them to complete similar jobs.

What are the consequences of misclassifying a worker?

Misclassifying workers can result in audits and severe penalties for an employer, and proper classification is a critical component of IRS compliance. Form SS-8 is provided by the IRS to help businesses that are unclear about whether a worker is an employee or an independent contractor. The form can be filed by either the business or the individual, and the IRS can take up to six months to issue a determination.

A good way to avoid the consequences of worker misclassification is to work with a trusted HR service provider or consultant. A partner like Valor Payroll Solutions can ensure that your business remains in compliance and empower business owners to focus on what’s important. Contact our team of experts today and see how we can help!