Classifying Employment Status – How to Define Full-Time W-2 Workers vs 1099 Independent Contractors

by Kathryn Carlson on May 14, 2015

Article Contributor: Kathryn Carlson

Employment status misclassification is a prevalent mistake in every industry.  Misclassification frequently happens because of two reasons, ignorance and/or attempting to save money on labor costs. It is estimated that a business can save 30% by hiring independent contractors. However, misclassification has serious consequences that can quickly add up to much more than any initial savings by incorrectly classifying an employee as an independent contractor.

Working with KPA clients, I frequently run into misclassification issues.  A recent situation was with an individual who had been working long-term for the company as an independent contractor and simply did not want to be classified as an employee, despite the fact that based on legal requirements he should have been.  This was a very serious situation: the Department of Labor is cracking down on misclassification in every industry, fining violators thousands of dollars for each instance as well as substantial tax bills.   The client asked that I help them determine the correct status so I started by helping the client understand the definition of an independent contractor versus a full-time employee.

Control of work is a basic test. Simply put, an employee is an independent contractor if they direct or control how the work is done and the results of the work. They are a full-time W-2 employee if they perform services that can be controlled by an employer, such as what will be done and how it will be done.  If you have classified an individual as an independent contractor and the following occurs you may have misclassified them:

  • The individual does not submit invoices.
  • They do not have a “boss.”
  • They have a specific schedule.
  • They use company tools such as vehicles, computers, or email addresses.
  • They are specifically trained or instructed.
  • They have a continuing, regular relationship with the hiring company.
  • They complete work that is essential to the hiring company.
  • They do not have time to pursue additional contract opportunities.
  • They are on a payroll instead of being paid per job.
  • They are required to work at a specific location.

In this particular case, the employee qualified as a full-time employee. He worked a minimum of 40 hours a week for the client company, worked at the headquarters of the company (per the company’s request), took direction and training from the company, relied on the company for his tools, and was paid twice-monthly instead of per job. No matter how we approached his role, he was defined as a full-time employee.

While this did cost the company more money up front in taxes, social security, and Medicare costs, it will save them a lot of money in the event of an investigation and back taxes. It was a bit difficult to convince the individual to become a full-time employee- he liked the perception that he was independent- I had to make it very clear that because of the challenges and the issues associated with our legal responsibilities that he was required to be a full-time employee or he could no longer work for the company.

It is in the best interest of every company to properly classify their employees. The Department of Labor is investigating all types and sizes of companies, already estimating that 20% of businesses misclassify workers.

The IRS provides guidance here to help business owner determine the correctly classified.

Do you have an employee that you fear may be misclassified? Contact [email protected] for help.

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Kathryn CarlsonClassifying Employment Status – How to Define Full-Time W-2 Workers vs 1099 Independent Contractors