Problems with 1099ing

If your company is using independent contractors (those workers you send 1099's to at year-end as opposed to your employees who get W-2's), we encourage you to evaluate the criteria by which they qualify as independent contractors. The IRS uses a 20-factor common law test to determine whether workers are independent contractors or employees. Between 1988 and 1994, using those tests, the IRS initiated 11,000 audits, made 483,000 worker reclassifications, and imposed $751 Million in back taxes and penalties.

A quick test that you can take is called the "A-B-C Test" and it is actually used by many states in determining worker status. (Texas uses the 20-factor common law test used by the IRS.) The "A-B-C Test" asks the following questions:

• Is the worker free from direction and control by your company, both under contract and in fact?
• Does the worker perform service outside your company's usual course of business, or is such service performed outside all of your company's places of business?
• Is the worker customarily engaged in an independently established trade, occupation, profession, or business?

If the answer to any of these questions is "no", the individual may be considered your company's employee.

The employee-independent contractor remains a hot issue for the IRS who continues compliance checks on small and large companies alike. The IRS believes businesses attempt to escape payroll taxes (FICA, FUTA and SUTA), reduce benefit costs and trim overhead by deliberately misclassifying employees as independent contractors.

In addition to the IRS headache, the Texas Workforce Commission (TWC) and disgruntled independent contractors, claiming discrimination as "employees" who did not receive company benefits, may also look to your company for respective relief.

In short, if your company is currently using independent contractors or is planning to use them in the future, please review the criteria by which workers are being classified in order to avoid the potential negative impact of improper classification.

A couple of solutions that CRG offers include: using our temporary employees to meet the needs formerly met by independent contractors, and/or utilizing CRG's payroll service function whereby CRG would actually be the employer-of-record for these seasonal workers you have historically used (see "Payroll Servicing" for details).

If you have any questions that we can help you address, or if you need a copy of the IRS 20-point checklist, please contact us.

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