When hiring temporary or contract employees, many employers are quick to classify these employees as 1099 independent contractors. Often, companies are looking to avoid paying for employment benefits and taxes. However, it’s a lot more complex than just having the employee fill out a different form.
Classifying your employee as an independent contractor versus a W-2 employee isn’t as simple as signing a contract stating so—in fact, the IRS would hardly consider such a contract when evaluating employee classification. Instead, the Department of Labor and the IRS consider how business is conducted between the company and the contractor to determine the accuracy of the classification.
When it comes to the IRS factors to determine the status of your employee, this is where many employers are failing. The IRS considers the following factors to classify an employee:
The behavioral test evaluates who controls the employee’s behavior throughout their assignment. If you are instructing your temporary employee on what work they should be doing and how they should be doing it, it is more likely that this employee cannot be classified as an independent contractor. Simply put, they aren’t acting very independently. The more control the employee has over their work and how they choose to complete it, the more likely they may qualify for this classification.
The financial factor of the independent contractor classification evaluates the extent to which the employer controls the business aspects of the employee’s job. The IRS states that the independent contractor must be responsible for a “significant investment” in job training and equipment. Meanwhile, a traditional employee is not likely to be responsible for these, and they may even be able to expense costs incurred from equipment or training.
Type of relationship
While the type of relationship between the employee and the business can be difficult to determine, this factor is evaluated by examining contracts, benefits, duration of assignment, and type of work performed. For example, independent contractors are typically hired on a temporary basis. Whether it’s a seasonal need or project-based work, there is usually an end date. However, when independent contractors are hired indefinitely, this violates the type of relationship required to classify your employees as 1099.
When employers aren’t able to pass the IRS factors test, they risk substantial fines, legal fees, and more penalties like paying back taxes and wages for misclassified employees. While the idea of cutting costs may sound good, not following the rules set by the IRS can end up backfiring.
Additionally, it’s critical to note that employees who are misclassified as independent contractors have a less than satisfactory experience. Not only are they responsible for paying their taxes, but they receive no benefits. Plus, they typically have very little ability to fight back when employers have violated their rights. If your company is misclassifying employees, it is unlikely that an employee would recommend you as an employer or consider working for you again. This not only leads to higher turnover, but it can also lead to an inability to attract talent.
Solution: Utilize a staffing firm
If you’re unsure of how an employee should be classified—or if you’re sure you’ve misclassified your temporary employees—the safest solution for your business is to utilize a temporary staffing firm. When your organization turns to a staffing firm, you essentially hand over employment responsibilities to the firm. Your temporary employees, in turn, become W-2 employees, where the staffing firm acts as their employer. With a staffing firm, you don’t incur any internal cost.
Additionally, some temporary staffing firms like The Execu|Search Group have built-in compliance departments who can properly screen, classify, and employ temps. Not only does this ensure correct classification when they employ your staff, but you can also utilize these compliance services for independent contractors who are already working for you to be positive that your hiring practices meet the requirements.
This hiring approach does more than significantly decrease your risk as an employer. When your temporary employees are under payrolling services like The Execu|Search Group offers, they are able to receive benefits from the staffing firm, and they’re no longer responsible for paying their taxes at the end of the year as a W-2 employee. This creates a much more positive environment for your staff, and it is a signal to them that you value their contributions.