Independent Contractors have been a common addition to many organizations for years, but have increased in use over the past several years as companies have shed their staff headcount. Independent Contractors are secured either directly and work in a 1099 capacity or they are brought into an organization via the route of a third party staffing or placement agency.
Like a test drive
The use of Independent Contractors is cost effective for organizations as the employer is not burdened with withholding payroll taxes, making matching payroll tax contributions, or covering the cost of the employee’s health and retirement benefit plans. Additionally, this is a great opportunity to see if an Independent Contractor will fit in with the organization’s culture as well as whether the individual will be successful in the role for which he or she was contracted. Independent Contractors who find success in their roles and fit in well with a company’s culture hold an advantage should they be hired to become regular employees of an organization as their learning curve is substantially shorter than that of an individual who is hired into the company from the outside. The Independent Contractor has already had an opportunity to become acquainted with the organization’s industry as well with the dynamic of its employees.
Employer has less control
Additionally, opting to allow an Independent Contractor’s contract to expire if he or she is not a good fit for the organization is a simpler task than terminating a regular employee of the company. Some disadvantages, though, are that the employer has substantially less control over an Independent Contractor. In addition, an Independent Contractor will not have the loyalty to the organization as would a regular employee. This can be problematic when employers need to strategize for succession planning and cross-training. With an Independent Contractor, employers do not have the same incentive to retain and train these workers as they would a regular employee of the organization.
If you are a business owner or contractor who provides services to other businesses, then you are generally considered self-employed. If you are a business owner hiring or contracting with other individuals to provide services, you must determine whether the individuals providing services are employees or Independent Contractors and ensure that the workers are categorized in line with their status.
Where the IRS steps in
It is extremely important to note that the IRS does not allow all workers to be classified as Independent Contractors. The IRS has strict guidance regarding the classification of W-2 Employees verses 1099 Independent Contractors. The basic premise behind the determination is the amount of control that the company has over the worker and how the work is performed. Another large contributing factor is how important to the work is to the company’s core business.
The IRS uses a 3-part test to determine whether an individual should be classified as an employee or contractor. This is certainly an area of the law where the IRS is increasing enforcement efforts. Therefore, it is critically important to ensure that workers are not misclassified as 1099 Independent Contractors when they should be W-2 Employees. Misclassification could result in substantial back taxes, IRS penalties, liability for workplace injuries, retroactive benefits, attorney’s fees, and other monetary damages.
If you're hiring an employee, or think you might be soon, check out our comprehensive resource page, Employee Onboarding - A Complete Guide. This is a handy, tightly-packaged outline that presents all the critical hiring and onboarding elements in simple, chronological order.