1099 vs w2 is Value Versus Time

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| Peter Radizeski of RAD-INFO, Inc. talking telecom, Cloud, VoIP, CLEC, and The Channel.

1099 vs w2 is Value Versus Time

First, I want to say that there is a big difference between a 1099 contractor and a W-2 employee. That I will explain here with help from the IRS publications. Then I will posit that today, when we hire skills, we are hiring not for time but for the value or the outcome. Management just hasn't caught up yet.

The federal government (the IRS really) has some specific guidelines on the difference between an independent contractor and an employee.* "Employee misclassification is something that the Feds aren't messing with. From large businesses to mom-and-pop shops, the fines are everywhere and they're not cheap," writes 10-til-2.

The IRS has 3 Common Law Rules: The difference between 1099 and w-2 come down to 3 Factors that provide evidence of the degree of control and independence fall into three categories:

  1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
  2. Financial: Are the business aspects of the worker's job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
  3. Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

As an employer, you have to ask yourself if the worker acts like a duck. "If the position requires the employee to be directed as to how, when, where and with what to do the job, then get quacking... he is a W2 employee. If however, the job will be done independently, then a 1099 may be the way to go." [10-til-2]

According to the IRS, "the independent contractor will work with a number of clients. The independent contractor's role is to accomplish a final result and it's the independent contractor who will determine the best way to achieve that result. The independent contractor will define what the agreed upon "result" is in a contract with your customer."

IRS Questions in Court - there are in fact 20 Points (see PDF)

A good example of an employee is someone who is required to be at the office at 9 am and dress according to code. Lunch is a specified time. The company supplies the laptop and the software and the worker has to report to a supervisor. That's a W2 employee.

* 1099 and the w-9 are IRS tax forms that an independent contractor collects. A W-2 form is for an hourly or salaried employee, who gets paid wages and has taxes withheld. Employees are also covered under state and federal labor law (like FMLA), workermen's compensation insurance, and benefits (if available). Until 2014 when ACA kicks in, 1099's are treated differently by health insurance companies, too.

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Today, with so many contractors in the marketplace - either as consultants, freelancers or temporary employees (through a staffing firm) - employers need to realize their liabilities. Microsoft settled for $97M and FEDEX resulted in $18M - both cases of misclassification of employees. The IRS wants their money - FICA, Social Security, etc.

Also, be aware that not all consultants are looking for full-time positions (just those that are using the contractor title until they land their next gig.)

When you are hiring for a project, are you hiring for the skill set or the project final result?

You aren't hiring the time of this contractor. Would you hire a plumber for his time or to complete the job? (FreshBooks has a nice ebook about time versus value.)

In a SOW (statement of work), the document focuses on responsibilities, results, deliverables. Isn't that what you are paying for? So in a nutshell, a contractor is hired for their value, the outcome - not his/her time.



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