1099 Worker or W2 Employee


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I don’t know how many of you are 1099 workers or W2 employees or hire them, but I want you to be aware of a few things. This is to help you out whether you run a business or if you are the worker. I would like to thank Lisa Hudspeth, Human Resource Specialist, contact info is hudspethld@gmail.com, for helping me put this together because I am no legal or Human Resources expert. I just thought this is something you should know and I put it together the best way I could to help the worker and the employer. I tried to remain unbiased.

A quick note, this is a very long post, so if you prefer to have a PDF of this post email me at wade4wireless@gmail.com and I will send it out to you.

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The wireless industry has had problems identifying 1099 and W2 work. Most companies want to hire 1099 workers because they feel they can get out of taxes and workman’s comp. It has been an issue in the courts or at least in arbitration. I hope this shed some light on the subject.

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Many workers look for work and the 1099 offers them a quick way to get paid. They need to understand the implications of this work as does the people hiring them. Without being properly educated then you quickly wind up in court if someone gets hurt or feels they got screwed. Remember that it’s all fun and games until someone gets injured on the job. Prepare yourself for the consequences of making the wrong choice.

First off, let me explain the difference. A full-time W2 employee will have completed a W4 upon getting hired. This needs be done immediately, for both the company and the worker to get the taxes aligned. You may have an option for insurance and you should be covered by workman’s compensation.

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If you are a 1099 contractor, then you are an independent contractor. Being an independent contractor the company you contract with only owes you pay for the either the hours you work or the task you complete according to your contract. You are considered a contractor. This means no benefits, and no workman’s compensation provided by the company that you’re contracting with. So if someone offers to make you a 1099 employee, you are not an employee but a contractor, again not an employee. Understand, you are a contractor, not an employee, get that into your head! You do NOT get the benefits that an employee would, no insurance or workman’s comp unless you pay for it.  Are you familiar with FICA, FUTA and SUTA? Better get on top of this if you are a 1099.

As a 1099 worker, what are My Self-Employed Tax Obligations?

As a self-employed individual, generally you are required to file an annual return and pay estimated taxes quarterly.

Self-employed individuals generally must pay self-employment tax (SE tax) as well as income tax. SE tax is a Social Security and Medicare tax primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. In general, anytime the wording “self-employment tax” is used; it only refers to Social Security and Medicare taxes and not any other tax (like income tax).

Before you can determine if you are subject to self-employment tax and income tax, you must figure your net profit or net loss from your business. You do this by subtracting your business expenses from your business income. If your expenses are less than your income, the difference is net profit and becomes part of your income on page 1 of Form 1040. If your expenses are more than your income, the difference is a net loss. You usually can deduct your loss from gross income on page 1 of Form 1040. But in some situations your loss is limited. See Pub. 334, Tax Guide for Small Business (For Individuals Who Use Schedule C or C-EZ) for more information.

You have to file an income tax return if your net earnings from self-employment were $400 or more. If your net earnings from self-employment were less than $400, you still have to file an income tax return if you meet any other filing requirement listed in the Form 1040 instructions (PDF).

Learn the Rules!

If you own a business, you need to be aware of the laws that surround 1099. When you hire these people they are not on the payroll and you have no income tax withholding, no employment taxes, no liability for acts of employees, no federal state discrimination laws that cover only employees, and no obligation to pay any benefits.

While this sounds good to the employer, there are disadvantages to hiring 1099 workers. For example, there is a basic understanding that independent contractors can choose whether or not they want to come to work without the fear of losing employment. They have the ability to control their own hours, and can typically get things done on their own terms without having to adhere to strict company policies – as long as the work performed has been completed and lives up to the standards that the employer has set out. It is not necessarily an “hours for wage” but it could be a “completed task for wage”.

SOW Training CoverScope of Work tutorial for the contractor.

If you think it doesn’t matter, then guess again. There have been sizable awards for high-profile companies such as Microsoft and Time-Warner/AOL due to misclassification of employees as contractors. So, you may want to consider that the potential pitfalls of how retaining independent contractors can outweigh the short-term savings in benefits and reduced paperwork for some firms. On the other hand, if the people you are engaging do meet the criteria of the IRS regarding independent contractors and you have well-crafted professional service agreements in place with each one and you are careful in administering their contributions and status, you will be fine.

One thing that really pushes the 1099 movement in tower work is workman’s comp costs. You see it all depends on the comp rate.  Businesses gets better with age and the comp rate should drop.  What is the comp rate, it’s calculated like this. A climber’s workman’s comp rate could be $28 per $1,000 of wages, (assuming $1,000/month wage). Let’s assume that for 10 climbers the payroll is $40,000 a month so the comp part would be $1,120 per month. Get it, $28×40=$1,120. I don’t know the exact wage so you will need to know it for your business.

Why does getting out of paying workman’s comp insurance sound to appealing? In the tower industry the workman’s comp insurance is really high, almost as high as scaffolding workers. I believe they may be the highest, but I couldn’t find proof to back that up.

Why go one way or the other?

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Why would an employee want to be a 1099 worker? Freedom to work with many customers and set their own schedules. Maybe it could be the only option they have to get work. It may be something where the worker wants to come and go as they please, and set their own schedule, and maybe they have a bunch of customers. They also have the right to walk away when they feel they have to.

Why would an employee want to be a W2 employee? Benefits and stable work, in theory anyway. Layoffs are very common in North America and the companies can do it with little or no notice.

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Why would you want a W2 employee over 1099? You want a valuable part of the team that can be an asset. This is someone you don’t want to share with the competition. You see, under IRS rules they are an employee if you direct their entire day, tasks, and training. Do you direct their daily tasks? If so then you need to consider making them an employee or risking a lawsuit.

Why would an employer want a 1099 worker? Maybe to complete a temporary task or to help in a work crunch or to complete a project. It would be a temporary need or it may be to call in an expert for a project. This way they don’t need to pay all the taxes and insurance required for a W2 when they only need temporary help for a project or task.

What you need to know.

If you are a W2 employee, you should have agreements between you and the company you are working for.  Make sure to review the employee handbook with the company policies. You may have a contract that includes scope of work, a non-compete/compete clause in your favor, and compensation.  You should fill out a W-4 IRS form, an I-9 immigration form (if needed), and an application.

If you are an independent company, then you should carry a plethora of insurance, if you have more than yourself working then you should hire an HR professional to complete your own handbooks, applications, I-9’s, job descriptions, business license, contracts, employee files, background checks, drug screens.  It is important to everything you hold dear about your income to do due diligence in providing the proper insurance and documentation.

If you are a 1099 then what you should have a contract between you and your employer, (using the word employer or 1099 makes my life easy!) The peril of using the verbal word and accepting the word of mouth of your employer or employee ~we have entered a verbal employment agreement that I can make supersede the original agreement and collect on any benefits due, payments for WC, Fines for the Company if you cause me grief in the form of SSI- FICA, FUTA, SUTA.  I would chew them up spew them out! ) should be a contract. This will protect the company and the worker, but most people on both sides don’t bother or they are afraid to fill one out. Why? You may think it’s so that you have work, but in the end you may look really stupid when you don’t get paid or the business gets ripped off. It is a 2 way street that hurts both parties both ways.

Get the Scope of Work training you need before you get burned!

I talked to so many people that say there is a real problem here in the US and it’s in the Southeast but I have nothing to back that up other than people telling me how bad things are. I think it’s important that both workers and businesses need to know the rules around this.

  • When does the worker become an employee even though he is a 1099? Will the worker get any benefits then?
    • If the contract is ignored and you are told to do something that is out of the scope according to the paperwork (SOW). (Remember my Scope of Work training and all the talk about it being part of the contract?) You are given additional assignments.  You are asked to stay or show up, do a company chore, train employees that are not yours.  A good attorney can bring a co-employment issue in, meaning while you had good faith that you were your own boss…you were not.  Is any of this sinking in?
  • What if the company won’t pay the 1099 worker, what can the worker do?
    • Take his contract to an arbitration hearing. If a check is missing from the payment schedule then the contractor should stop all work and collect all employees as to cease and desist until his contract is resigned or continued. So this means you will miss work if you are the worker and that the company must go to hear your side of the story! It’s not a win for anyone but it proves a point if you are the worker that you won’t be pushed around.
  • What if a 1099 worker gets hurt on the job?
    • Then surely he has his own insurance…. Right?

Why they put “Contract” in Contract Work.

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What do you need to know about contract work? Well, let me explain, straight from Lisa Hudspeth, (Human Resource Specialist, contact info is hudspethld@gmail.com ), first off make sure you have a contract. What is a contract? It is an offer of work and compensation based on the needs of 1) the company and 2) the contractor.   The contract can be handwritten. It should be signed by both parties. This contract is the “be all” of deals.  It’s could keep you from being “let go” or be good tender for exchange of goods helping insure you are paid at the appointed contract times.  This could be a scope of work, and I have a tutorial here on how to write and read one. Make sure that if you use the SOW, it is signed by both parties!

The contract could allow you to stop working if you’re told your check is lost or “messed up”. Be sure if you call yourself a contract worker, you have a contract.  Business owners should beware if you call yourself a contract employee or employer then the word “employee” holds strong issues with the courts. Reminder to the business owners and the contractors out there, don’t be afraid to dot your I’s and cross your T’s. Prevention is the best cure, and in this case the contract may prevent a lawsuit going forward.

Classifying a Contract Worker.

QuickBooks has a good round of questions that ask businesses if they are workers or 1099, let’s look it over. It can be found here. I will sum it up:

  1. How regularly does someone work for you? In other words, are they working for you daily? Are they working for you part-time, occasionally, or just for specific projects? See the difference? Full time, W2 is likely, even if it’s full time for a month. Part time could go either way. Part time or every Friday is very different from daily, get it?
  2. Do you as the boss set the persons schedule? Do you, seriously, do you tell the person when and where to be on a daily or weekly basis? If the worker sets his own schedule, then things lean towards a contractor. If you set the schedule, then leaning towards W2.
  3. Do you, as a business owner, instruct or supervise the worker? If yes, then you are training and providing direct supervision, W2. If the worker is doing all of that on their own then it would lean towards 1099.
  4. If additional workers are hired, who does it? The business or the worker? Business leans towards W2, worker leans towards 1099.
  5. Who provides the tools? I believe this is obvious.
  6. How is the worker paid? Hourly or weekly or monthly or a fixed schedule, leaning towards W2. On a project basis or commission, then it would lean towards 1099.
  7. Is your worker economically dependent on your business? Yes leans towards W2, No leans towards 1099.
  8. Does the worker make decisions that impact personal profits, or losses? Yes leans towards W2. No leads towards 1099.
  9. Is the worker working for you indefinitely or for a specific period? Indefinitely leans towards W2. Specific time leans towards 1099.
  10. Are the workers a core part of your business? Do you need this person to increase profits and is he critical? Yes leans to W2 and no leans to 1099.

Be aware of the SS-8 IRS form!

By the way, if you are a 1099 worker or have them work for you then you need to be aware of the SS-8 form, found here. Why? This form keeps both parties honest. You heard me, education is the key. Many workers can make the transition either way, from W2 to 1099 or 1099 to W2. Just look at the form for more information,

So what can you do business owner or worker? Did you ever hear the term “prevention is the best cure”? The plan ahead! Make a contract prior if the partnership is a 1099. Why, to protect both parties so that when something bad happens the court or the arbitration goes well. If you think it won’t happen to you, then you are rolling the dice. In Vegas they didn’t build the casinos because they lose a lot, they got the money because rolling the dice and losing. Are you willing to take that chance? If you’re a business owner you have a lot to lose and if you’re a worker you could lose everything with no chance for help. Write a handwritten contract if you have to, just get something in writing. Many of you know I have SOW tutorial found here. Did you know that the SOW can be a legal contract? Find a way to protect yourself.

A quick note, this is a very long post, so if you prefer to have a PDF of this post email me at wade4wireless@gmail.com and I will send it out to you.

References:

Lisa Hudspeth, Human Resource Specialist, contact info is hudspethld@gmail.com

http://tentiltwo.com/running-your-business-blog/1099-vs-employee-you-need-to-know-the-difference/

http://quickbooks.intuit.com/r/1099-w2-employee-calculator/

https://www.irs.gov/pub/irs-pdf/fss8.pdf

https://www.irs.gov/Help-&-Resources/Tools-&-FAQs/FAQs-for-Individuals/Frequently-Asked-Tax-Questions-&-Answers/Interest,-Dividends,-Other-Types-of-Income/1099-MISC,-Independent-Contractors,-and-Self-Employed/1099-MISC,-Independent-Contractors,-and-Self-Employed-1

https://en.wikipedia.org/wiki/Workers%27_compensation

http://www.dol.gov/owcp/regs/compliance/feca810m.htm

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