“How do you know the difference between a 1099 and a W-2 worker?”

By Vivian Giang


The growth of the freelance economy has become a costly problem for the Internal Revenue Service.Misclassification of workers as freelancers and independent contractors instead of full-time employees has resulted in billions of dollars in lost tax revenues.  Companies don’t have to pay worker’s compensation, unemployment, and disability taxes for freelance and contract employees (s0-called ‘1099 workers’).

The problem is, if you’re getting treated like other full-time, salaried employees and you have the same assignments and tasks they do, you should be receiving those benefits.Your employer should be paying those taxes.

[box] “I think this is a massive problem that will be more evident in the coming years,” Jeff Wald, co-founder of Work Market, tells Business Insider. [/box]

Wald’s company works with firms like Lockheed Martin and Omnicom to prevent misclassification of employees, which could trigger an audit by the IRS.Remember when Microsoft had to pay the IRS $97 million on a benefits case brought on by long-term temps who should have been classified as W-2 (full-time, salaried) workers? This is exactly the situation that Work Market is trying to prevent.”You can 1099 anyone you want, but are they really an independent contractor? In the end, it’s a judgment call by the government,” he says.

How do you know the difference between a 1099 and a W-2 worker? Wald says there are a few questions you should ask yourself:

1. Who does this person really work for?

To figure out if an employee is really a freelancer or independent contractor, ask yourself: Does she provide services for several companies at a time? Does she have an actual business? Does she have an office she works out of? Does she have marketing materials for her business? Or a business bank account?

If you answer “no” to these questions, she is likely a W-2 employee.

2. How do you pay this person?

Freelancers and contractors should be paid a fixed fee for assigned projects, says Wald. Unlike full-time salaried employees, a freelancer’s financial situation should not be solely reliant on your business.

Avoid paying this person an hourly, daily, or weekly rate, reimbursement for expenses, or bonuses. You should also refrain from providing tools, such as computers, because if they are working on multiple projects at a time, freelancers should be able to provide their own equipment.

Basically, the more financial independence they have from your business, the less risk there is in misclassifying them.

3. How do you interact with this person?

To continue reading Vivian’s article click BusinessInsider
Photo credits Hannie Teh and Tom Magliery
[author] [author_image timthumb=’on’]http://static6.businessinsider.com/image/51367c2b6bb3f72d5c00001c-265/vivian-giang.jpg[/author_image] [author_info]Vivian Giang runs the Careers vertical at Business Insider. She’s fascinated by the evolving office, growing industries and how technology, education and the rise of freelancers play a role in the future workplace. Previously she freelanced for Dan Rather Reports and worked in public relations in Colorado. She’s had internship stints with CBS, CNN and TBS. Vivian has an M.A. in Business and Economic Reporting from New York University and a B.A. from the University of Georgia. She resides in Chinatown and is working on a collection of short stories.[/author_info] [/author]

Leave a Reply