If you are paying 1099 employees, You're Probably Doing It Wrong
Over the last few years, the State of California has severely limited the use of the Independent Contractor Classification in regards to how employers can legally classify their workers. In order to classify a worker as an independent contractor, they must meet all three factors of the “ABC” test. The three qualifying factors are:
- A: Is the worker free from the control and direction of the hiring entity in the performance of the work, both under the contract for the performance of the work and in fact?
- B: Does the worker perform work that is outside the usual course of the hiring entity’s business?
- C: Is the worker customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity?
If all of these three factors are not met, then the workers are presumed to be employees. It is important that your business conduct are view if your independent contractor agreements to ensure they meet the ABC test. Employers that misclassify workers face the potential for stiff fines and payroll tax obligations, as well as claims for unpaid minimum wage, overtime, meal and rest period break premiums, and benefits.
The best example that we share with our clients is this: If we hire a contractor to come in and service our computers and printers, we make sure to not tell them when to show up, and how long they are required to work. We don't help or make any suggestions on how they should do their job, then this an example of an independent contractor.
They are not under our control. They are not performing work directly related to the company product, in this case, payroll. Finally, IT work is an established service where someone could make an occupation solely doing this. I am able to write a check to this contractor for their services and provide a1099 at the end of the year because all three qualifications of the ABC test are met. If i take that same contractor, but this time have them processing payroll and handle client questions and I also tell the individual when they need to clock in and clock out, then they would not be considered a1099 employee and A & A would be forced to W2 the employee because they fail 2 of these 3 tests. It only takes failing one of these tests to not considered an independent contractor.