The difficulty of the task performed by “independent contractors” plays a significant role in 1099 worker misclassification cases here in San Diego. The Department of Labor (DOL) and the IRS have helped to establish new guidelines for the property classification of a 1099 worker since a landmark US Supreme Court Case a few years ago. One of the distinctions required to justify an independent contractor or 1099 relationships is the difficulty of the work itself. If the work is easily performed by any employee of the company you will face allegations of misclassification and an expensive audit battle seeking to penalize you as an employer and collect hundreds of thousands in back wages, payroll taxes, unpaid benefits, FICA, unemployment and workers’ compensation fees.
The safest path is to work with 1099 professionals who have a license or advanced professional degree. If there is some form of certification or extensive training associated with the work performed this will help in defense of an IRS audit or employment related federal agency inquiry. Each agency has its own guidelines and interpretations, from the DOL to the IRS, from the California FTB to the EDD. Each will approach the question of 1099 workers from a skeptical point of view searching for any way to establish misclassification and pursue your company for an extensive amount of money. These cases often result in the closing of a business due to the extensive associated penalties, back taxes and wage awards.
Another critical aspect is whether or not the work performed by a 1099 worker is critical to the company’s central business itself. Most federal and state agencies assume the more critical and essential the 1099 work is to the central business conducted by the company, the more likely it is that the company itself will exercise more direct control over the work performed. Employment agencies and the IRS want to ensure the independent contractor has the ability to set pricing and experience the opportunity for profit or loss. If the relationship isn’t genuinely two separate and distinct businesses be prepared for 1099 worker misclassification cases at the federal and state level.
The business and tax attorneys at Allen Barron protect clients who face 1099 misclassification audits or hearings. If you are concerned about the misclassification of your 1099 workers we invite you to contact us for a free consultation at 866-631-3470.