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Watch Out – They are Coming After You! (1099 Warning)

December 20, 2011 by Ed Becker

1099 Classifications — States and the Federal Government are Cracking Down

States and the Federal Government are hiring agents to go after employers who are not abiding by employee classification laws. Why? Because with huge budget deficits, pinging small businesses with penalties can bring in revenue for struggling states.

Both the New York State Department of Labor (“NYSDOL”) and the Internal Revenue Service offer specific guidelines for qualifying a worker as a “1099 Contractor” (instead of as an employee). To avoid penalties, follow these guidelines:

First, as an employer, you’ll want to understand that the employer-employee relationship is based on “control.” Facts that provide evidence of the degree of control and independence fall into three categories:

  1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
  2. Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
  3. Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

If you answer Yes to any of these, the employee you just hired probably does not qualify to be designated as a 1099 contractor.

What are your risks (legal and financial) as an employer for classifying your hires as contractors vs employees:

  • Employer portion of FICA and Medicare taxes plus penalties and interest, which can increase your exposure significantly
  • Federal and State Unemployment taxes
  • Workers Compensation Insurance
  • Potential Civil penalties (up to $2,500 per employee for your first offense and up to $5,000 per employee for subsequent offenses)
  • Potential penalties (up to 30 days in jail for first your offense and up to 60 days in jail for subsequent offenses) governed by the NYSDOL

Each employer should evaluate their usage of 1099 contractors and consult with their CPA to ensure compliance with all state and federal guidelines. Fixing the problem now will help lessen your exposure moving forward.

Don’t wait, they are coming after you and the risk to you personally and your company is too great.

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