1099 Labor- Is it really saving you anything?
Through the good times and the bad, business owners are always looking for a way to improve their bottom line. For many companies a place many businesses look to save money is within the classification of their employees. Contract labor, or 1099’s, are an approach some employers look at which can seem beneficial, however this may be a very slippery slope.
Before anything else it is very important to consult your insurance agent, your tax accountant, and also your attorney to make sure you are looking at all aspects of this employee classification properly. There can be tax implications that affect the way your business taxes are filed which can cost you if these are not correct, and your control indicated either directly or implied can determine legal implications as well.
I am an insurance agent (not a tax accountant or Attorney), so the insurance aspect is what I will address:
The most common area this issue arises is regarding workers compensation insurance. Each state has specific guidelines regarding the qualifications to meet the 1099 classification for your employees. If an individual does not meet all of these guidelines he/she will typically be treated as a W-2 “True” Employee.
This means they will be considered with the employee count when determining if you are required by law to carry workers compensation in your state. I have seen several employers who have seen this issue with their applicable department of labor and this is an issue that is much better to catch on the front end by doing your research and consulting with professionals.
Most insurance carriers, when performing a workers compensation audit, will consider sub contractors who have their own company and perform work for multiple companies as sub contractors as long as they provide proof of their own workers compensation coverage. If the sub or 1099 does not show proof, the carriers will typically add any payments made to that sub over the course of the policy term as additional auditable payroll. This is a major cause of many workers compensation audits we see.
A few things most states look for in determining if your workforce meets the qualifications for 1099’s are:
1. Do your employees use their own tools?
2. Can they come and go and take breaks as they please?
3. Do they work just for you or also for other companies?
4. Do they have their own company/business entity in place?
Here are a few questions you should ask yourself can help determine which option is best for your business:
How much control do you need over my workforce in order to effectively run your business? What are the guidelines for individuals performing work for your company to meet the 1099 classification in your state? What are the pros and what are the cons to each classification (both short and long-term)?
This is an issue that could be discussed and debated forever and there is not a clear answer to which is the best option as it may be different for each business. I have seen very successful business using each platform and some utilizing both. The key to their success does not necessarily lie under which classification of their workforce they chose, but more under the homework and organization they did up front to make sure they are set-up properly and looking at the long-term benefits not just what appears to be a quick savings on the front end.
The important thing to take from this is that the subject of 1099 vs W-2 employees can become a very complex process when classifying your workforce. Having this put together right in the first place will save you a lot of time, headaches and money in the long run.