W-2 vs 1099 is it really that big a deal?
Yes it is really a big deal! And it extends to how you talk about it.
A few days ago I answered a question about insurance and using a Nanny in your house. My response was posted to a chat board and I was taken to task by an attorney for using the terminology “1099 employee”. And she was correct.
I know better but I had made a quick response about the need to properly insure for those who work in your house or business and referred to two classes of “providers of service” – employees and 1099 contractors. But – I referred to the 1099 contractors as ‘1099 employees.”
You might ask “Everybody I know says that, is there really a big difference?
The answer would be a resounding “Yes” and here is why. If you call them “Employees” they are not “contractors” and the difference can cost you a great deal. I explained this to an employer that has the term used in this manner in an employee announcement “If you are a full time employee you will be offered employee benefits, if you are a 1099 employee you will not be offered those benefits as you are not eligible.” That document can be used in an audit to demonstrate that in fact you consider those people you’re employees.
Governments collect taxes on payroll, and various other “Employee” related events. When you hire a contractor you avoid those taxes because the contractor is supposed to pay them. It is much easier to collect from you than track down all those contractors.
Employees are under your direct control, and 1099 contractors are not, and there are very specific definitions that apply. I will borrow from the attorneys response and would be happy to connect you with her if you wish.
“Tax: Use the right to control test and the IRS 20-questions. Remember that both IRS and Arizona’s DES are quite aggressive in asserting that all workers are W-2s. It’s all about the money.
Fair Labor Standards Act/Arizona Minimum Wage: Use the economic realities test. The US Department of Labor has an Arizona Initiative going to aggressively pursue all Arizona employers who are using 1099s. Again, it’s all about the money. Workers’ compensation: Use ARS 23-902D. The Arizona Legislature helpfully gave us a hybrid test and a template agreement to use.”
This actually is a very big deal and if you are using the 1099 designation to avoid all those expensive taxes, or providing employee medical plans under ACA, you really need to address it because the attorney is correct about auditing and the expensive implications of avoidance.