W2 or 1099: A closer look

This episode is a continuation of the conversation from Episode 5 about W2 vs 1099 Sub-Contractor, and a closer look into the two options

Transcript

                            Episode 6:  W-2 VS 1099’s -- The Checklist

 Today, I want to continue talking about the subject of W2 and 1099 subcontractors or subcontracted services. So, this is more of a ‘deep dive’ and a part 2 of last week’s episode.

I’m recording a Part 2 to this subject because some people have written in and requested that I do a more in-depth run down of the 1099 rules and regulations.   

Since this is an on-going conversation that I have with many of my clients 12 months a year, I was going to go into more depth anyway. I know that you can search the internet for this information, but there is a checklist that is worth going over point by point. 

There are 20 bullet points that I want to cover today. Some of them are self-explanatory so although this episode could be 4 hours, it won’t be! I promise!  

Let me first say that these are guidelines. They are not iron clad point by point. If the status of an individual goes to labor court, they look at all these 20 bullets and then make a decision of the status of the worker using all 20 factors that we will talk about today. If any of these answers are YES, then the individual would be leaning toward a W-2 employee status: 

 1. “Must the individual take instructions from your management staff regarding when, where, and how work is to be done?” This is pretty self-explanatory, but in simple terms, if you are giving instructions to the worker to the way you want the work done, then that leans toward a W2 status. Key word here is “MUST” 

2. “Does the individual receive training from your company?” This would be a training class, or a training manual of any kind. 

3.  Is the success or continuation of your business somewhat dependent on the type of services provided by the individual?” This is a little ambiguous, but simply, if the person who you hire to perform their specific services is required  to make your business successful, then again, it leans toward a W2 status. In other words, if you hire a person to perform a service and that person is the ONLY person who is performing that specific task that is essential to your business, then they would lean toward a W2 status. If you already have an employee performing that task and you want to hire a second person to do the same task, then a subcontractor status is safer. 

4. “Must the individual personally perform the contracted service?” This means that if you hire a person who is the only person who can perform that particular service, and no one else in their company can do what you hire them to do, then, again, it sways toward a W2 status. Exception: A Bookkeeper, for an example, could be a single person operation, and he/she is the only one who performs that service. 

5. “Have you hired, supervised, or paid individuals to assist the worker in completing the project in the contract”?  This means that if you hire someone as a subcontractor, and then you hire or already have an employee who helps this person perform that service, then that situation would lean toward a W-2 status, and not subcontracted services.

6. Is there a continuing relationship between your company and the individual?  Again, a little ambiguous, and bookkeepers are a definite exception -- but generally, if you hire a subcontractor, it’s for a specific purpose for a specific amount of time.  Usually in the form of a contract. 

7. Must the individual worker have ‘set hours? The key word here is “MUST” If you hire a subcontractor, only they can make a ‘schedule’ for themselves, but you, as someone who have hired them, cannot. They are independent, hence the term independent contractors or subcontractors.

8. Is the individual REQUIRED to work full time at your company?  Pretty self-explanatory here. Full time people are W-2 employees with very few exceptions. One of the exceptions might be a 6-month contracted IT person for your company to set up or fix computers 40 hours per week. After 6 months, the contract ends. 

9. Is the work performed on your company premises? Again, self explanatory, but there are exceptions. If the work is performed at your office or on your premises, then the contractor needs to bring his/her own tools, computer, and tools of their trade with them. 

10.   Is the individual REQUIRED to follow a set sequence or routine in the performance of his/her work?  Key word here:  REQUIRED. 

11.   MUST the individual give you reports regarding his/her work?  Again, key word:  MUST.  I give reports to all of my clients at the end of each month, but do I HAVE TO?  I should, it makes sense, but I don’t HAVE to. Some clients request reports, and I offer reports before most clients’ request, but it’s not a MUST. If a contractor has to report about how the project is going or if it’s on schedule, then that person should be a W-2 employee.

12.   Does the individual get paid by the HOUR, WEEK or MONTH? Generally, if the answer is yes, it leans toward a W-2 employee status.  However, lots of exceptions to this.  Once again, bookkeepers and accountants. I have clients on retainers, and I have an hourly fee, but bill once a month.  The idea here is that a subcontractor is hired for a specific service for a specific amount of time by a contract with an ending date. 

13.   Do you reimburse the individual for general business or travel expenses? That’s an important one. As a subcontractor, you should not be reimbursed specifically for car expenses, subway or train expenses or tolls.  The subcontractor would invoice you and your company and include those fees in the total amount of what they bill you with no specific ‘line items’ as reimbursements. W-2 employees should only get reimbursements through payroll, so that the reimbursements are not taxable to the employee.

14.   Do you supply the individual with tools or materials?  Covered earlier.  The subcontractor brings his/her own tools, materials, computer, pens, pencils and any other tools of their trade.

15.   Have you made a significant investment in facilities used by the individual to perform their services? Basically, you are not allowed to build an office, for example, for a subcontractor to work in. If you build a brand-new computer tech repair room and then you hire someone for a contracted service, then that would be one exception. 

16.   Is the individual free from suffering a loss or realizing a profit based on their work?  You can’t share any kind of profit or loss that the company would make or lose with a subcontractor. Employees can get profit sharing. Subcontractors can’t. 

17.   Does the individual only perform services for your company? Again, a little ambiguous. All subcontractors have to have a website which will service to advertise for their services, business cards, and invoices with the name and address of the company on them when they bill you. If they have all of that, and they only work for you, then that’s ok, since they are, in theory looking for other subcontractor work. If your company is ever audited, the auditor will ask (and I know this first hand) for your subcontractor’s business cards, website addresses, invoices that they sent to you, and sometimes business certificates from when they created their businesses. 

18.   Does the individual limit the availability of his/her services to the general public?  If YES, then that would lean toward a W-2 relationship. 

19.   Do you have the right to ‘discharge’ the individual?  The word ‘discharge’ is connected to a W-2 employee situation.  If you have a subcontractor with a specific contract with you and there is a breach of contract, you can sue the subcontractor and end the contract in that way. But you can’t FIRE a subcontractor. 

20.   Can the individual terminate his/her services at any time? If the answer is yes, then that is a W-2 employee relationship. However, in reality, many subcontractors don’t have contracts with the company who pays them. So, as a bookkeeper, can I walk away from a client whenever I want?  Sure, if I don’t have a contract or an engagement letter signed by the client and myself. But if I did that, it’s not a good reputation to have.  

There are exceptions to many of these bullet points. Set designers, for an example, hire subcontractors for each job that they have .They have specific rules when the subcontractor is on set. Rules like cell phones have to be fully charged at the beginning of each day. Sneakers must be worn so that walking on the set will be quieter than shoes if they are shooting. But the industry of set designers overall hires subcontractors and not employees. The assistants come and go and work for several different set designers. 

Another example would be landscaping companies. Since there are many ‘projects’ that have a beginning and ending date, hiring an individual and paying them as a subcontractor (as needed) makes sense. If, however, the company needed a gardener 35 hours amaintenance of properties, then it would be a better idea to hire them as a part time W-2 employee, since it would be an on-going relationship. 

An Event-Management Company -- if a company is hiring for an event that lasts 7 days, even if they have set days and schedules for the individuals who they hire, since the event has a beginning and an end date, there is no need to hire the individual as a W-2 employee just for 5 or 7 days. However, if your company is in one state and the event is in another state, you would have to make yourself familiar with that state’s labor laws to cover yourself.  In any case, you have to be careful not to have sign in sheets or phone apps that your subcontractors would need to ‘sign in’ at the beginning of their day for each day of the event.  

This is a very complicated issue, but using these guidelines should help on classifying an individual as a subcontractor or an employee.  If there is a real dilemma on what status an individual should have -- W-2 or a subcontractor, error on the safer side by classifying the individual as a W-2 employee even though it’ll cost your company a little bit more money in payroll taxes and other fees --  just to cover yourself and help you sleep at night! 

I hope this helps simplify a very tough subject in taxes, accounting and bookkeeping! 

As always, please comment at Bookkeepermensch@gmail.com or Numerex@numerexonline.com 

Hope to hear from you! 

Until next time, I’m Paul Rosenblum