It’s official. The Independent workforce is here to stay. As of now, fully 30.2 million Americans are working independently on a full or part-time basis annually, and our State of Independence research estimates that fully one-third of the non-farm private workforce, 45 million people, will be working independently by 2020.
Which means if you haven’t already, you’ll be employing some of these consultants or freelancers soon.
Read carefully. That last sentence wasn’t an issue of semantics. Are you really employing these workers? Or are they contractors, consultants, freelancers, or solpreneurs? Whether or not your organization has a policy that defines the difference, the government definitely does (see the DOL’s July 15th memo for a doozy of detail) – and you don’t want to end up on the wrong side of it.
If you’re not managing your 1099 compliance properly, you run the risk of audits, having workers reclassified – and all kinds of penalties.
Workers in nearly every specialty are moving away from traditional employment and toward an independent consulting model. As an organization using independent talent, compliance all comes down to a few things:
1. Clearly Define Status
Your organization splits taxes with every employee, and pays unemployment tax, as well. But if an ex-independent contractor (1099 worker) of yours files for unemployment, it can trigger a cascade of audits on the local, state, and federal level – more than $10 million in federal funding is dedicated annually to implement or improve employer misclassification initiatives. Your company may be able to fight the claim, but by then the damage has already been done.
Because employers pay FUTA and SUTA taxes for an employee and don’t have to for a 1099, an unemployment claim can give the appearance that a company used 1099 status to avoid paying unemployment taxes.
Without clearly defined employment status, your company is also open to class-action lawsuits for overtime, stock options, pension plans and other benefits not provided to 1099s.
2. Know The Rules
The standards for determining whether an individual is an employee or an independent contractor differ between Federal agencies, such as the Department of Labor and the IRS, and also in numerous states pursuant to their laws. The smart move as you engage with independent contractors is to familiarize yourself with the varying sets of rules by which agencies can judge compliance and make sure that your contractors understand them, as well. This can save you numerous IC compliance headaches down the road.
3. Maintain Visiblity
From maintenance to management, you should know every independent in your organization and what they’re doing. Organizations roll the dice when they know little about what non-employee workers do, how much they are paid, and why they are, in fact, not considered employees. Who manages your contractors? HR? Procurement? Some combination of both? Without solid management, many of your non-employees - independent contractors, consultants, and freelancers currently working as "1099s" - may be misclassified and could be reclassified by the IRS or state tax authorities as employees of their organization. And that takes you back to the audits and penalties in point one, above.
IC compliance is a real issue. To protect yourself, it’s important to employ risk mitigation techniques and put an independent contractor governance program in place that takes into account the various state criteria for proper classification (not simply focusing on the more well-known IRS three-factor test). Not only will you protect your organization – you’ll maintain peace of mind and become a more attractive place to work.
Need more help? MBO Partners is the industry’s only end-to-end business solution that ensures that you engage and manage your independent population compliantly. We’d love to speak with you about how we can help save time and money managing your organization’s growing independent population.
As a follow up to our blog a few weeks ago when we brought forward the parallel of financial markets and the basic elements of managing investments to describe “human capital,” today, we continue our series. This second part looks into the the next element, enablement.
Don't let internal disputes and arguments regarding consultants lead to independent contractor missclassification issues.