Winding Up in the Penalty Box with the IRS Will Cost You More than 2 Minutes.
Every time I hear so-called “experts” or misinformed consultants suggest that cleaning business owners can or should hire their workers as 1099 independent contractors – I literally cringe! This is not only bad advice, it is advice that could potentially bankrupt your business and result in incarceration under some circumstances.
Some owners apparently think that their cleaning employees are qualified to give advice on this issue as well when workers ask not to have payroll taxes withheld from their wages and issue 1099s instead. Since wrongly misclassifying workers as independent contractors can make you liable for payroll taxes you declined to withhold, this would make the seemingly easier and cheaper way to go VERY COSTLY INDEED.
Following is a partial excerpt from IRS Publication 15-A:
To determine whether an individual is an employee or an independent contractor under the common law, the relationship of the worker and the business must be examined. In any employee-independent contractor determination, all information that provides evidence of the degree of control and the degree of independence must be considered.
Facts that provide evidence of the degree of control and independence fall into three categories: behavioral control, financial control, and the type of relationship of the parties. These facts are discussed next.
Behavioral control. Facts that show whether the business has a right to direct and control how the worker does the task for which the worker is hired include the type and degree of:
Instructions that the business gives to the worker. An employee is generally subject to the business’ instructions about when, where, and how to work. All of the following are examples of types of instructions about how to do work.
- When and where to do the work.
- What tools or equipment to use.
- What workers to hire or to assist with the work.
- Where to purchase supplies and services.
- What work must be performed by a specified
- What order or sequence to follow.
The amount of instruction needed varies among different jobs. Even if no instructions are given, sufficient behavioral control may exist if the employer has the right to control how the work results are achieved. A business may lack the knowledge to instruct some highly specialized professionals; in other cases, the task may require little or no instruction. The key consideration is whether the business has retained the right to control the details of a worker’s performance or instead has given up that right.
Training that the business gives to the worker. An employee may be trained to perform services in a particular manner. Independent contractors ordinarily use their own methods.
Financial control. Facts that show whether the business has a right to control the business aspects of the worker’s job include:
The extent to which the worker has un-reimbursed business expenses. Independent contractors are more likely to have un-reimbursed expenses than are employees. Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important. However, employees may also incur un-reimbursed expenses in connection with the services that they perform for their employer.
The extent of the worker’s investment. An independent contractor often has a significant investment in the facilities or tools he or she uses in performing services for someone else. However, a significant investment is not necessary for independent contractor status.
The extent to which the worker makes his or her services available to the relevant market. An independent contractor is generally free to seek out business opportunities. Independent contractors often advertise, maintain a visible business location, and are available to work in the relevant market.
How the business pays the worker. An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time. This usually indicates that a worker is an employee, even when the wage or salary is supplemented by a commission. An independent contractor is often paid a flat fee or on a time and materials basis for the job. However, it is common in some professions, such as law, to pay independent contractors hourly.
The extent to which the worker can realize a profit or loss. An independent contractor can make a profit or loss.
Type of relationship. Facts that show the parties’ type of relationship include:
- Written contracts describing the relationship the parties intended to create.
- Whether or not the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay.
- The permanency of the relationship. If you engage a worker with the expectation that the relationship will continue indefinitely, rather than for a specific project or period, this is generally considered evidence that your intent was to create an employer-employee relationship.
The extent to which services performed by the worker are a key aspect of the regular business of the company. If a worker provides services that are a key aspect of your regular business.
I have been hearing the debate on this issue for more than 20 years. For goodness sake, let’s end the debate once and for all. However, if you still feel that you want to pursue the matter further, please be sure to become familiar with ALL OF IRS Publication 15-A and check directly with the IRS for clarification.