5 Risky Myths About Independent Contractor vs. W-2 Worker Classifications

You’ve worked hard to grow your business – long days, over-extended finances, time away from family. But (finally!) it’s paying off and it’s time to expand and hire more help! But the rules of engagement are confusing out there – do you hire W-2 employees or one paid contractually and tracked via 1099?

Shifting regulations and gray areas present thin ice for you to tread carefully in these hiring decisions.

Clearly, you do not want to put your business at risk.

In 5 Risky Myths About Independent Contractors vs. W-2 Worker Classifications, Part One, I will share beliefs business leaders have discussed with us that led them to misclassify workers, typically as Independent Contractors when they should be W-2 Employees. This is particularly risky behavior for small and medium sized companies, who may directly employ workers incorrectly, subjecting the firm to possible audits with resulting fines, back wages or taxes assigned, and even courting the possibility of additional regulatory penalties. Multiple federal and state government agencies are on the lookout for misclassified employees. In particular, you can watch out for these common beliefs that could subject you to costly risks:

Risky Myth 1

All software workers can be paid as a 1099

Many small software and technology firms tell us they think ALL software workers can be paid as a 1099. This incorrect belief is not true about any worker classification – either for software engineers or administrative assistants or financial and accounting specialists. The profession itself is not part of any IRS or agency questionnaire; rather the focus is on the dependence and integral role played by the worker.

Risky Myth 2

You can pay up to ten 1099 contractors before the IRS will audit your company for misclassification

There is no arbitrary number of independent workers that will trigger an audit. It could take only a single misclassified employee to capture the attention of watchdogs; with actions like a 1099 worker applying for unemployment benefits, or questioning their status, which can catch the eye of regulators who are hungry for what is perceived as missed payroll taxes, under-paid employee benefits, and potentially lost income taxes. Beginning in 2010 the federal government stepped up efforts to identify misclassified workers, with an announcement to conduct 6000 random audits to identify misclassified workers, activities that were accelerated one year later with budget increases and continue today.

Risky Myth 3

Your accountant will advise you if your business is at risk, and if they don’t say anything, you assume the business is clear and safe

In our experience, accountants are not always trained on worker classification with the ability to fully assess and categorize a worker. Their focus is, of course, accounting and financial reporting. They may advise, for instance, that regular employees who work at home, a number that has grown by 5.6% recently, could be incorrectly categorized as Independent Contractors. If they are misclassified in the eyes of federal and state governments, you will still be held responsible for fines, penalties, and interest, in many cases these fees are retroactive.

Risky Myth 4

If a worker spends less than 40 hours a week, you can pay them automatically as an independent contractor

Classification checklists issued by the Internal Revenue Service and the Department of Labor do not allude to the number of hours worked as a checkpoint on worker classification. Problems with misclassification begin to pile up with this false belief, since both Federal and State mandates can accrue for W-2 workers even with less than 40 hours a week. For example, states such as Connecticut, California or Massachusetts require sick day accrual for days worked. If your workers are misclassified today, you could be held responsible for allocating retro benefits tomorrow.

Risky Myth 5

Anyone working from home can be classified as an Independent Contractor

Perhaps the biggest fallacy outlined in this post is the belief that all remote workers can be readily classified as Independent Contractors. In 2016 GlobalWorkplaceAnalytics.com reported that fully 50% of the US workforce holds a job with at least partial telework, and 1 of every 5 workers teleworks with some frequency. Fortune 1000 companies are actually revamping their physical plant and workspaces to accommodate these changes, which has no bearing at all on worker classification. 3.7 million W-2 workers now work from home at least half of the time.

Key Factors in Worker Classification

The kind of work, the methods for completion, and the relationship with the firm are the key factors in worker classification.

In Part 2 I continue with another 5 worker classification myths that can put your business at risk, but are still prevalent in the marketplace today.

Questions About Worker Classification?

Ask any of our expert staff at ClearPath.

Our focus at ClearPath is to protect you and your business from costly classification mistakes. Call today for guidance and a path to your peace of mind.

Have an amazing day! And I’ll see you back here later this month when I’ll describe another 5 myths to watch out for!

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