We got a significant amount of feedback on our list issue pertaining to W2 Employees vs. 1099 Independent Contractors. This week we are continuing the discussion in more detail with information regarding the IRS guidelines for each, and how this affects the inflatables industry and your business.
As suggested by the IRS, when determining whether work will be conducted by an Independent Contractor or an Employee you should consider three factors of control pertaining to the work and your business; Behavioral, Financial and Type of Relationship.
Behavioral Control refers to the control and direction the worker will be given. An Independent Contractor is qualified as someone who the hirer has the right to control or direct the end result of the work, and not the means used to accomplishing it. Contrarily, with an employee you can control both what will be done and how this will be accomplished. Take into consideration the following when determining the level of behavioral control necessary to do a job; type of instructions given, degree of instruction, evaluation systems and training necessary to do the job.
Financial Control refers to the control of the economic aspects of a worker. Independent Contractors generally provide and use their own equipment (including vehicles and necessary inflatable installation and setup tools). They are also likely to have unreimbursed expenses if a job requires such (i.e. gas, mileage), whereas an employee would be able to file an expense report with the company for a full return of their out of pocket money. An employee is generally paid by a regularly occurring paycheck of a set amount (either hourly, weekly or other period of time). Independent Contractors are paid a flat fee by the job, generally due upon completion of the work.
The final factor, Type of Relationship, refers to how the worker and the business perceive and operate their relationship. This includes contracts, employee benefits, term of the relationship, and services provided. Generally employee benefits include insurance, paid vacation and sick days. However, not offering these benefits to a worker is not sufficient to make them an Independent Contractor. Hiring a worker with the idea that the relationship is indefinite is generally enough evidence to have the worker considered an employee. Contractors should be hired on a job-to-job basis with no long-term forecast for the future.
Simply stating the status of a worker (either employee or contactor) in a written contract is not enough to determine the worker’s status with regard to the IRS. Instead the nature of the relationship between the two parties is what will determine this.
Weaving the world of whether or not to hire an employee or contractor can be a tricky one. You need to evaluate your business’ needs and what you perceive coming out of the relationship. A general rule of thumb for the inflatables business is that if a worker is using a company vehicle and company tools it is best to go the employee route.