Could Hiring 1099’s Put You Behind Bars?

By Taylor Edwards, JobNimbus. 

The federal government uses three tests to determine if someone should be considered a full-time employee or not. 

Ask anyone responsible for hiring full-time employees (FTE) and they will tell you that there are a lot more financial factors than just a salary. On top of pay, you have to consider the costs of workman’s compensation, health insurance and other benefits. Hiring full-time employees requires forethought and planning that most contractors simply don’t have time for. That’s why hiring independent contractors is such an attractive option for plenty of business owners.  

It seems so much simpler to agree on a piece-rate and let the sub do their thing, but be cautious when it comes to filling out that 1099, says Steve Dalton, chief financial officer at JobNimbus. 

“A 1099 independent contractor, if you look at it, they’re around 30% cheaper than an employee, so it makes perfect sense,” says Dalton, an expert in business finance and accounting. “The problem is, the IRS and the Department of Labor both take the stance that you have to prove that someone is a contractor, otherwise they assume they’re an employee.” 

Requiring proof means you can’t hire someone to do work only for you, then pay them as a 1099 independent contractor to save 30% on the other costs of having an employee. You must clearly show the IRS and Department of Labor that this person isn’t an FTE. 

Are you toeing the line? If you don’t want to be surprised by financial penalties, read on. According to Dalton, the federal government uses three tests to determine if someone should be considered a full-time employee.  

Behavioral control 

How much of the worker’s day are you controlling? If there’s a set start time, a dress code and a specific amount of hours being worked each day, then you probably have an employee on your hands.  

Independent contractors are going to have a lot of autonomy because they are hired to do the job, not to be your employee. They are able to work as many or as few hours as they need to get the job done. Anything more than that starts to approach an employee/employer relationship.  

Responsibilities 

“Is the work they’re doing the same as what your employees are doing, or is it a special project?” asks Dalton. “If they’re doing the same things your employees are doing, you’ve probably got an employee.” 

A special project can range from building a website to doing some of your bookkeeping, and even if you have a massive build coming, you can justify hiring some independent contractors. But if it’s a normal job and you have contractors working next to your employees consistently, the government isn’t going to like that.  

The working relationship 

Does the person work exclusively for you or do they have multiple companies they work for? If they are paid exclusively by you, that looks suspiciously like an employee. 

“If they’re doing the same thing for multiple employers, it’s much easier to classify them as a contractor,” says Dalton. 

Take care 

What happens if you are treating an employee like a 1099 contractor? Penalties can range from fines to legal action. It’s not uncommon for the government to sue businesses that cross the line.  

Protect yourself and your business from negative action by taking a hard look at your 1099 workers and being sure they have autonomy, specific and special projects, and don’t work exclusively for you. If they aren’t meeting these criteria, consider hiring them as full-time employees. Taking them on as an employee may require more payroll and benefits on your end, but it’s better than being on the wrong side of a courtroom. 

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