If you run a small business that hires 1099 contractors, also known as independent contractors, it is vital that you have them sign an independent contractor contract. This is because there is a significant gray area between who is classified as an independent contractor and who is classified as an employee.
Contractors vs. Employees
If you’re not careful, a court or the IRS may find that your 1099 contractor should actually be considered an employee. This could mean you have to pay back taxes for Social Security withholdings, Medicare withholdings, and unemployment insurance. Further, you could be responsible for Workers’ Compensation and under other workers’ protection laws, and your workers may have the right to organize.
There is no magic formula to determine who is classified as an independent contractor vs. employee. Whether or not you had your workers sign an independent contractor contract is an important factor, although it is not controlling. The most important factor is the amount of control the employer exerts over the worker. A carefully drafted contractor contract will demonstrate an employer’s lack of control over how, where, and when the worker conducts the work.
These are some factors a court or the IRS uses to consider whether a worker is an independent contractor vs. employee:
- Does the employer control where and when the worker works?
- Does the employer provide supplies, materials, tools, etc?
- Is there a written contract or agreement in place describing the nature of the relationship, whether independant contractor or employee?
- Will the relationship continue?
- Is the worker paid hourly or on a project-basis?
- Does the worker receive benefits?
- Is the work an essential part of the business’s normal operations?
- Is the work expected to be the worker’s sole source of income?
- Are specific skills required to perform the work?
There is no one way a court or other entity will apply these factors in any given situation. Courts consider the totality of the circumstances and the specificities of each situation. In fact, courts apply the factors differently when deciding different employment issues, so a worker may be classified as an independent contractor in one context, but the same worker could be classified as an employee in another context.
Small business owners should be careful when hiring 1099 contractors to ensure they are not accidentally treating the workers more like employees. Further, it is a necessity that small business owners require that all 1099 contractors (independent contractors) sign a carefully drafted independent contractor contract.