1099 Contractor, Employee, or Temp Worker?
Sometimes it can be difficult to choose what type of worker you want to hire. The decision to hire someone will affect the productivity, morale, overhead costs, and service quality of your company. There are many myths, misconceptions, and laws surrounding the different types of hired workers. Adding to the confusion, the employer’s responsibility varies with each type. This article will help you understand the benefits, the risks, and what your responsibilities are as an employer.
Independent Contractor
An independent contractor, or 1099 Contractor, is a legal and tax-related term used in the United States to refer to the type of worker that contracts his or her services out to a business. They need to fill out a W-9 form when beginning employment, and be sent a 1099 in January for tax purposes.
Benefits:
Using a 1099 contractor allows for flexibility in expanding and shrinking your work force based on work load. Hiring a contractor for a specific time period or project makes it easier to accommodate fluctuating or periodic bursts of activity.
By using a contractor, you avoid the costs associated with having an employee—including payroll taxes, worker’s compensation insurance, and benefits. Contractors usually provide their own equipment and work space. Although you don’t have to pay employer taxes for contractors, the government requires you to report how much you pay them if it’s over a certain amount.
Risks:
When you hire a contractor, you must do it properly or you risk substantial back taxes, interest, and penalties. It’s more than just signing the correct form—they must meet specific characteristics and IRS standards.
You have less control over a contractor’s time and efforts than you do with an employee. A contractor is free to accomplish your project in the manner, location, and time of his or her choosing. Unless otherwise specified in the contract, you do not have rights to intellectual property or copyrights for a contractor’s work. They also have the right to substitute another person to do the work you hired the contractor to do without your consent.
Employee
An employee is an individual who was hired by an employer to fill a specific position. They barter his or her skills, knowledge, experience, and contribution in exchange for compensation from an employer. They can be hired to work either part-time or full-time. Make sure they fill out a W-4 form at time of hire, and be sent a W-2 the following January for tax purposes.
Benefits:
Hiring an employee gives you more control than you have with a contractor. With an employee, you can determine when, where, and how you want something done. Also, intellectual property that employees create belongs to your company.
Because you hire employees for the long term, they have time to get to know your business and your customers very well. Committed, dependable employees can often be relied upon to manage the business during the owner’s absence.
Risks:
As an employer, you are responsible for certain costs of having an employee. Among these are:
- Employer’s portion of federal and state payroll taxes
- Unemployment Insurance
- Worker’s Compensation Insurance
You are also responsible for meeting many legal requirements—there are laws that are intended to reduce discrimination, help with disabilities, and protect employees from wrongful termination. Not only do you need to meet a wide range of legal requirements, you may find it necessary to provide some benefits to keep good employees.
Hiring an employee is a big decision. You may have liked them in an interview, but later discovered that they’re not quite right for the job or your company. Unfortunately, terminating an employee is not as simple as asking them to leave. As long as the employee is performing adequately, they have certain rights to continued employment.
Temporary Workers
A temporary worker is a person who is brought in to fill a role or position for a short period of time. The temporary worker may be under contract for a set period of time or may have an ongoing contract. They are usually hired through a staffing agency.
Benefits:
You can often hire a temporary worker through an agency and later hire them as a permanent employee of your business. This is an ideal way to determine an employee’s performance before making a long-term commitment. Using temporary workers can also be a good alternative to using contractors because you have more right to supervise and control the work they do.
Temporary workers are usually hired through a staffing agency. Because employment is all they do, they have the resources to reach hundreds of candidates to fill your position quickly. When you hire a temp, the person is an employee of the staffing agency—which means you pay the agency rather than the individual. The agency then handles all payroll taxes, worker’s comp, and other costs.
Risks:
Hiring temp workers could create morale problems in the business. Providing benefits to permanent employees but not to long-term temps can result in resentment, performance issues, and problems between employees. Or, after a certain period of time, you may be required to offer temps the same benefits.
Using temps is not a way around your responsibilities as an employer. Although temp workers are employees of the staffing agency, your company might also be held responsible in cases of hiring discrimination, sexual harassment, workplace safety, or other situations that directly involve your workplace.
Because you hire temp workers through a staffing agency, you’ll typically pay more than you would for an employee.
Classifying Workers
The classification for contractors is determined by means of an IRS test. It’s important to understand what it is, as the risks of misclassification are significant.
The test is fairly subjective, and can be influenced by what’s common practice in your industry. It examines 3 key areas:
- Behavioral Control- The amount of control the employer exercises over the manner in which the job is performed.
- Financial Control- The extent of financial responsibility and risk assumed by the worker.
- The Relationship- The understanding and agreement between parties.
To decide whether a worker is a contractor or an employee, the IRS will ask whether a worker is dependent on only your business for continued work. The greater the dependence, the more likely they’re an employee. A worker will almost always be classified as an employee if the company has the right to determine when, where, or how the work is done. If the worker bears considerable financial responsibility, has control over the manner and means of work, and is operating under a written contractor agreement, they are a contractor.
The IRS is aggressive about identifying misclassified contractors, and the back taxes and penalties for an incorrect classification can be steep. You may be subject to an audit if someone you hired as a contractor later files for unemployment or worker’s comp.
As always, consult your accountant or lawyer for financial and legal advice when hiring a worker.
(To find forms mentioned in this article, please visit www.irs.gov)