I want my clients to MAKE MONEY, but first I want them to stop losing money and stay out of trouble. My focus as a business coach and consultant is to help employers and leaders of groups maximize their resources and find profitability. For most businesses, their most overlooked resource is the talent, love, and loyalty going untapped in their workforce. From under-utilized talent to outright abuse, employers are too frequently lost when it comes to dealing with employees. Misuse of a workforce stunts business growth, hurts customer service, increases turnover rate and training expense, but what concerns me most is when it breaks labor and tax laws.
As I write today, it is February 2018, and I am seeing a trend that repeats itself each and every year. Employers are scrambling to get out their W2 and 1099 tax forms. Employers that have been complaining to me about attendance, punctuality, insubordination, and other common HR problems are now telling me that the employees are 1099 employees aka “independent contractors.” My heart typically skips a beat, and we reset for a little education.
According to the IRS, “the general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.”
If you or your business are utilizing independent contractors, you should not have typical HR problems, because you are not able to direct work schedules, or supervise how work is accomplished. 1099 is a very simple contract relationship where the business has a specific task they need accomplished by an independent person who has the expertise to accomplish it. It can be a repeated task, such as an article on your editor’s desk every Monday by 5 a.m., or 10,000 widgets sold each quarter of the year. Beyond that, the business must not dictate when or how the contractor completes the work. Either party can end the relationship according to what they have outlined in their agreement, but there is no supervisory role to play, and that is often hard for those managers / supervisors who have control issues.
Something I often find when coaching managers and leaders is they have a ‘need’ to supervise. They interject themselves into situations that do not require their input. From employees we hear this as ‘micromanaging,’ but the managers see it as being useful or supportive. To me, a micromanager has a need to oversee and approve every small detail of a project to ensure quality. This is sometimes necessary and sometimes not, but employees see a lack of trust in their ability.
Micromanaging is a little different than a manager who is seeking usefulness, likability, and approval from their subordinates. These managers often have high-performing teams and find themselves feeling less than necessary. This situation is very common in the 1099 scenario. A business or manager has brought on a qualified and/or licensed contractor to complete a task. It doesn’t require any supervision, but the supervisor interjects their self anyway. By doing so, they have changed the relationship to that of an employer and set up significant tax liability for the company.
This is most apparent in sales and office settings, especially where pay is commission-based. Pay and supervisory role are separate things. A W2 employee can be paid a normal salary, hourly rate, or commission only (as long as it still meets minimum wage requirements), while still being required to work certain hours, report to a manager, adhere to a dress code, or any other normal employment requirements. On the other hand, a 1099 employee can also be paid based on agreed salary, submitted hours, or commission only, but they cannot be told when or how to complete their task.
If you have employees who you require a certain number of hours, a set starting or ending time for their workday, or menial reviews of their work tasks that are not specifically outlined in a contract, then you should NOT be forcing them into a 1099 situation. 1099 employees have self-employment tax liability, because normal withholding isn’t being completed. Matching social security and medicare funds are not being paid by the employer. As the employer in that situation, you could find yourself in a bad situation, and liable for back taxes and penalties.
If you are an employer with 1099 employees, please seek professional advice from an attorney or accountant to make sure you are in compliance with the laws. If you find yourself in frustrating situations with 1099 employees, you are likely doing it incorrectly.