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Independent Contractor or Employee? How to Get It Right Every Time — Q&A Session

Does your business rely on freelancers, project workers and other “independent contractors” to get things done? In this special Q&A session, “1099 Queen” Marcia Miller asks common classification questions from webinar attendees.

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Question: If we provide the independent contractors with a checklist of things that we promised the end customer, is that too much control?

Marcia: When I’m talking about control, I’m talking about your control over the independent contractor, not the end user. Somebody was interested about the case citation, when I spoke about the landmark Microsoft case: Discanal vs. Microsoft.

Question: I have a few employees who work a regular schedule and then clean the office after hours as an independent contractor; are there any legal issues with this?

Marcia: It’s not a legal issue so much as it is a misclassification of your worker. Once an employee — always an employee; It’s very possible to give a given employer more than one job. For example, we have managers who have to work in more than one department. If you have somebody who’s moonlighting in the evening, cleaning your offices, unless they have an existing business, say the person with their spouse cleans at night and you’re paying that business and it’s an ongoing business; that will be different. The primary problem in doing this is giving a W-2 and a 1099 to the same individual with the same Social Security number in the same year.

Question: What if you have a contractor who works for an hourly rate; a deliverable is assigned, and then they billed the hours needed to complete the work?

Marcia: Not unlike what I do as a professional, whether you’re a CPA, you’re an attorney, we bill by the hour. Billing by the hour does not decrease our independent contractor’s status. It’s not like paying someone a minimum wage, an employee, or a W-2 person.

Question: I mentioned that independent contractors can’t work side by side along employees. What if the job you hired them for is to work alongside an employee for the duration of the job. How does that work?

Marcia: Let’s go back to Microsoft again; in that case, you had engineers sitting side by side doing the same work as the others, it was a full-time job to do the engineering of the platform for Windows. They were given tools with which to work; they were even given special security passes to get in and out of the Microsoft campus, just like the person alongside of them were doing. It wasn’t that they were doing something different outside of those people. If you want to read about that case, it will give you more details about that.

Question: What are your thoughts on hiring independent contractors who work outside the U.S.? What are the penalties for misclassification?

Marcia: What is our responsibility with foreign workers? For example, if you have somebody in the Philippines, who’s a great website guru and they set up the website for you in middle of the night, and they do it on their own time and send you the login and information; do you have a responsibility to give them a form? In this case it would be a 1042 or a 1099, because, for a foreigner do you have to give them that for the work they performed? If they work outside of the country for you, they’re no different than your vendors that you buy merchandise for or from outside of the country. For a case like that, that particular independent contractor is just another vendor.

Now let’s say that person did such a fantastic job for you that you are going to pay that person to come to the U.S. to your factory in Atlanta and you want to set up logins for all your people because this person did such a great job for you. In that case, the work is being performed here in the U.S. and its called “sourced” here in the U.S., because they still aren’t an employee, but they are an independent contractor who would get either a 1042 or a 1099, depending on their status here.

Question: Can an outside salesperson working on commission only be classified as an independent contractor?

Marcia: In most cases, outside salespeople, especially realtors, do get a 1099 at the end of the year, but don’t confuse this with someone who is an employee of a given company and there are certain perks or bonuses or commissions they get while working there. Perhaps they get a draw, but they still get a paycheck every week. Those are employees; any money you give to them will be part of their W-2 wages.

Question: Can I hire someone as an independent contractor and as a part-time employee with the same company but with different duties?

Marcia: (See question 2). This reminds me of a case locally; a lot of teachers on the weekends are hired as umpires for school teams. In a case like that, that’s outside their regular employ, but they are still working for the given school, so those hours they’re being paid to coach the kids, or referee the kids, that goes as part of their W-2 or employee wages.

Question: Someone said, “I stated that you cannot send that W-2 and 1099 to the same person in the same year.” What if a person is doing side work for you, but does have a full-time job with another company? Do we send a 1099?

Marcia: In that case the side work is just being done for you and you’re issuing that 1099. The full-time job with another company is going to issue a W-2, so it’s coming from two different employers.

Jaime Lizotte
Presented by: Jaime Lizotte,
HR Solutions Manager
Many businesses choose to work with independent contractors, which is perfectly acceptable. But only if you follow the legal parameters. The IRS has strict worker classification rules regarding who is a contractor and who is an employee. Get it wrong and you could face severe penalties, including back taxes, steep fines and, in some cases, even prison.

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