Should I classify my workers as “W2” or “1099”
When expanding you workforce, there are many reasons why you may choose to hire an independent contractor versus a Full-Time or Part-Time employee.
For example, here at AG we have been expanding our Technology and HR Software development team over the last 5 years. This expansion has lead to some sole searching about the best way to staff for the extra workload as well as how we view the role and responsibility of this new workforce. Ultimately we have chosen to go the “W2” route for our team, based on the nature of the data security and our need to dictate work hours.
As a counterpoint to our Technology & HR software team, we do have project based partners that we utilize from time to time on a 1099 basis. Our marketing department is actually a blend of W2 and outsourced 1099 independent contractors. We pay the indepenent contractors on this team for a final product versus the paying for their time. Having the flexibility and paying for a known deliverable project helps us from a budgetary standpoint and works really well for us.
Helpful Insights to Consider
When trying to determine whether an individual is an employee or independent contractor, keep these characteristics of independent contractor arrangements in mind:
- The employer generally seeks the independent contractor out, not vice versa.
- The employer has to negotiate terms with the independent contractor.
- Training is not an issue – contractors are experts and should not need training.
- The employer is buying a finished project or completed service, rather than hours of work on an ongoing basis.
- Is there a noncompetition agreement? A noncompetition agreement is strong proof that the worker’s services are directly integrated into the primary service provided by the employer.
- Is there a nonsolicitation agreement? A worker may be made to sign a nonsolicitation agreement, but such agreement must be narrowly tailored to protect the company’s relations with the clients served by the contractor – anything stronger than that will resemble a noncompetition agreement.
- Is there a nondisclosure agreement? A worker may be made to sign a nondisclosure agreement, but it should be narrowly tailored to protect the confidential information to which the contractor will have access during the project.
The Texas Workforce Commission tax examiners often look for certain “red flags”
- Using terms such as “1099 employees” or “contract labor.”
- Having contractors wear company badges or uniforms indicating their affiliation with the company.
- Giving contractors a company email address or cc’ing them on company emails.
- Inviting contractors to company parties and other events using the same invitation that goes to regular employees.
- Giving contractors company benefits or wage advances.
- Having contractors sign company policy handbooks.
- Having contractors sign noncompetition agreements.
In an audit suituation
You should try to show things such as the following to assist in establishing that the worker is an independent contractor:
- Contractors’ business cards indicating how the contractors are in business for themselves.
- Contractors’ invoices to your company on their own stationery.
- Copies of any advertisements they use for their own businesses.
- Links to the contractors’ websites.
- Written contracts for provision of services or performance of a project, one of the provisions of which covers recourse for premature termination of the contract and noncompletion of the work (that is to help show that there is not an at-will employment relationship).
- Emails, letters, or other documentation relating to negotiating the parameters of the work.
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