Subcontractor/Contractor and Economic Realities
In layman’s terms, the question is often “Do I W-2 this person or 1099 him?” Basically, we’re asking is the individual performing work on behalf of a company an independent contractor or an employee? It’s an age old discussion we, as many HR professionals and accounting/bookkeeping personnel have had with employers over the years. The real question to the government is, “Do I get my payroll taxes upfront, or can I trust this ‘independent contractor’ to pay his income taxes?” Again, this is perhaps oversimplified, but the essence of the issue.
In the past, the “ruler” to determine this was the IRS 20 factor test which focused more on who controlled the individual’s work – the contracting company or the individual himself. The “ruler” still required interpretation, but the issue was “who controls the individual’s work”. The new interpretation (already in force without room for comment by the general public, unlike the DOL exempt threshold discussion in this section) gives greater weight to another ruler, the economics reality test, or the extent to which the work performed by the individual is an integral part of the Company’s business and the extent to which the individual is economically dependent upon the Company’s compensation. Let’s reiterate – economic dependence of an individual on a Company was an issue in the past and one which we took into consideration when advising clients about whether an individual was really independent contractor or employee. It’s receiving greater weight now.
A fair question that we’ve been asked a lot is, “I’ve never had a visit from DOL. Has something new happened to increase that risk?” The short answer is, “Yes”. We discuss specifics as well as what to expect with a DOL audit in the DOL Why Should We Care.
What should you do?
- Make a list of everyone you’re compensating for services performed (every person in your Vendor list), including the cleaning staff, maintenance, plumbing, IT.
- Make a list of everyone to whom you’re giving a 1099.
- Cross off the obvious Independent’s, i.e. AT&T, payroll companies that you absolutely know have a number of clients and for whom your payments to them are a drop in the bucket.
- What’s left is a list of your possible IC/Employee issues.
Now you have a few options:
- If you have plenty of time on your hands, you can read the following two documents:
http://www.dol.gov/whd/regs/compliance/whdfs13.htm
http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Independent-Contractor-Self-Employed-or-Employee - You can take 15 minutes to call Bob or me to briefly discuss your remaining vendors to get our input on whether you have a critical issue to be dealt with.
- You can take that list to a symposium/training we’re holding; Subcontractors, Exempt Employees and Internal DOL Audits (date & location to be announced). Pre-register here.