5 Reasons Your 1099 Contractor is Actually Your Employee
I’m going to come right out and say it. 1099 contractors are almost always employees. Almost always is probably shooting low because as far as landscapers, detail shops, contractors and similar businesses, you fail the IRS criteria test over 90% of the time. I know this may surprise some of you reading this, but if you didn’t think this was the case you probably wouldn’t be here reading this. I wrote 5 reasons your 1099 contractor is actually your employee to highlight this important compliance subject for small businesses.
The Contractors Handled Everything Without Any Input From Me
In over two decades of business, any time my companies ran into a situation where we utilized actual contractors was to pick up slack during busy times. I had a few guys that had started with us and came to me after a few years to ask if they could go out and start their own business. I told them no problem as long as we could still send them some of our overflow work. I even rented them space in one of our buildings where they stayed for years.
I point this out to give you an example of what an actual contractor looks like. They had their own liability insurance. Their own books, bank accounts, etc. They handled their own workers comp coverage. And they paid their own taxes.
When these contractors were done with actual work that I sent them, they left me an invoice. I never told them how to do their job. I just told them what I needed done and they handled it for the agreed upon price. That, in itself, is an essential criteria on the list that the IRS uses to determine if your contractor is actually an employee or not.
That is what a true 1099 contractor looks like.
5 Reasons Your 1099 Contractor is Actually Your Employee:
- The contractor is a properly licensed business that is in business to perform the type of work you are hiring them to do. Is your employee actually a licensed business? Do they have any other clients or customers? These are all important issues that the IRS looks at.
- The contractor owns their own equipment and doesn’t need to “borrow” your equipment to complete the work. Does your employee own their own equipment?
- The contractor has the expertise to do the job you are hiring them to do with no direction or training from you on how to do the job. Does your employee work at your direction, when, how and where you tell them to work?
- The contractor has their own business liability insurance to protect you if they damage your property. This is a big item and one of the easiest ways your insurance carrier and the IRS will catch you erroneously classifying employees as contractors.
- The contractor will complete the work and invoice you. Does your employee complete a time sheet? Do they complete a per car checklist that you assign? All of these systems are historically tried and true employee tracking systems.
With tax time upon us, it’s a good idea to take a few minutes and think about ways to reduce your tax liabilities and make sure you are in compliance. Penalties and interest are two words you don’t want to ever deal with as a taxpayer.
Get Your Business Tuned Up and In Compliance
Starting a new year is a great time to get your business tuned up and in compliance. If you are reading this then there’s a good chance that you already think you may be out of compliance with the 1099 issues.
The IRS and your State Department of Revenue are two government organizations that you don’t want to have problems with. You are on their radar simply because you’re a small business. Certain business categories make them look at you even harder. So follow the rules and don’t get yourself into a jam with these people.
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