Maybe not 1099 reasons. But there are good reasons to go the independent contractor route versus hiring employees. Of course, there are also compelling reasons to go the other direction on that. There’s a lot to consider when you make this choice, so let’s dive in.
Independent Contractors Versus W2 Employees
Before we get into the reasons to hire independent contractors, we need to understand the essential differences between the two, especially from the point of view of the IRS. Straight from IRS.gov, an independent contract is “an individual is an independent contractor if the payer has the right to control or direct only the result of the work, not what will be done and how it will be done.” With a W2 employee, the business must pay income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax. There are also insurance costs involved. With a 1099 contractor, the business simply pays contracted rates, and the contractor pays all associated taxes. It’s obviously important to get this right, as the business may face penalties, fines, legal fees and even an audit otherwise.
Read More: I’m Hired! Going Entrepreneur
Pros And Cons Of Hiring Independent Contractors
Depending on the business model, there are several advantages and disadvantages to hiring a contractor versus an employee.
Pros of Hiring Independent Contractors:
The Supreme Court of California issued a ruling on April 30, 2018, which is likely to have a significant adverse impact on business owners. The primary issue in the matter of Dynamex Operations West Inc. v. The Superior Court of Los Angeles County was whether an entity that hires an individual worker can classify such a person as an employee or an independent contractor.
The ruling now creates a rebuttable presumption that such individuals are considered employees. The ruling, however, is limited to only California’s wage orders. As such, it would not currently apply in other contexts such as for workers’ compensation or for tax purposes. Therefore, an entity may be able to classify a worker differently depending on the context.
In 1913, the Industrial Welfare Commission (IWC) was established in California in order to regulate wages, working hours, and working conditions. In 2004, the legislature of California defunded IWC, however, the wage orders established by IWC are still enforced to this day by the California Department of Industrial Relations, Division of Labor Standards Enforcement.
So where a business has been treating its workers as independent contractors and there is a concern that the IRS in an audit would not respect this arrangement, what can the business do?
The business should consider entering into the IRS’ Voluntary Classification Settlement Program (VCSP). The VCSP is a voluntary program that provides an opportunity for taxpayers to reclassify their workers as employees for employment tax purposes for future tax periods with partial relief from federal employment taxes. To participate in this voluntary program, the taxpayer must meet certain eligibility requirements and apply to participate in the VCSP by filing Form 8952, Application for Voluntary Classification Settlement Program, and enter into a closing agreement with the IRS. Read More
Australia’s 2012 “significant investor” residence visa scheme has attracted some 1,000 applicants who have committed to invest AUD4 billion in businesses or other complying investments. To date, the vast majority of applicants have been from Chinese nationals.
The scheme might have been expected to attract some interest from Russian entrepreneurs and investors. However, Australia’s personal tax rates may be a distraction (an effective maximum marginal rate of 49% currently applies to income in excess of AUD180,000 pa). Furthermore, the current geopolitical situation around Ukraine and the flight MH17 atrocity may now deter potential applicants who might be regarded as associates of the Russian leadership. Read More
Each year the IRS mails millions of notices. Here’s what you should do if you receive a notice from the IRS:
1. Don’t ignore it. You can respond to most IRS notices quickly and easily. And it’s important that you reply promptly.
2. IRS notices usually deal with a specific issue about your tax return or tax account. For example, it may say the IRS has corrected an error on your tax return. Or it may ask you for more information.
3. Read it carefully and follow the instructions about what you need to do. Read More
Payments to Independent Contractors can be a very grey area within the tax law. Often times I am asked the question, “Should my employees be given a W-2 or Form 1099-MISC for there pay?” There’s really no clear-cut answer to this question. It’s important to answer other questions to even begin to get some clear direction on the proper way to classify a worker as an employee or an independent contractor.
There are two types of business relationships which may exist between an employer/owner and a employee/worker. They are 1. Independent contractor and 2. Employee (common-law employee).
These business relationships are established based on common-law rules: Read More
a. Behavioral Control
I. INDEPENDENT CONTRACTORS SHOULD RETAIN CONTROL OF THEIR WORK
The most fundamental difference between employees and independent contractors is that employers have the right to tell employees exactly what to do and how to do it. This is a recipe for disaster for the employer that intends to treat its workers as independent contractors. Whatever you do, don’t supervise or control an independent contractor as if he was one of your employees. It’s perfectly okay to provide detailed guidelines or specifications for the results that you expect from your contractors. But how those results are achieved must be left entirely up to the contractor. Read More