Should I classify my workers as “W2” or “1099”?
When expanding your workforce, there are many reasons why you may choose to hire an independent contractor versus a Full-Time or Part-Time employee.
For example, here at Generous Benefits we have been expanding our Technology, Data Analytics, and HR Software development team over the past few years. This expansion has lead to some soul searching about the best way to staff for the extra workload, as well as how we view the role and responsibility of this new workforce. Ultimately, we have chosen to go the “W2” route for our team, based on the nature of the data security and our need to dictate work hours.
As a counterpoint to our Technology & HR software team, we do have project based partners that we utilize from time to time on a 1099 basis. Our marketing department is actually a blend of W2 and outsourced 1099 independent contractors. We pay the independent contractors on this team for a final product versus the paying for their time. Having the flexibility and paying for a known deliverable project helps us from a budgetary standpoint and works really well for us.
Helpful Insights to Consider
When trying to determine whether an individual is an employee or independent contractor, keep these characteristics of independent contractor arrangements in mind:
- The employer generally seeks out the independent contractor, not vice versa.
- The employer has to negotiate terms with the independent contractor.
- Training is not an issue – contractors are experts and should not need training.
- The employer is buying a finished project or completed service, rather than hours of work on an ongoing basis.
- Is there a non-competition agreement? A non-competition agreement is strong proof that the worker’s services are directly integrated into the primary service provided by the employer.
- Is there a non-solicitation agreement? A worker may be made to sign a non-solicitation agreement, but such agreement must be narrowly tailored to protect the company’s relations with the clients served by the contractor – anything stronger than that will resemble a non-competition agreement.
- Is there a nondisclosure agreement? A worker may be made to sign a nondisclosure agreement, but it should be narrowly tailored to protect the confidential information the contractor will have access to during the project.
Download Complete Guidance
Texas Workforce Commission Tax Examiners Often Look for Certain “Red Flags”
- Using terms such as “1099 employees” or “contract labor.”
- Having contractors wear company badges or uniforms indicating their affiliation with the company.
- Giving contractors a company email address or cc’ing them on company emails.
- Inviting contractors to company parties and other events using the same invitation that goes to regular employees.
- Giving contractors company benefits or wage advances.
- Having contractors sign company policy handbooks.
- Having contractors sign non-competition agreements.
In Audit Situation
You should try to show the following to assist in establishing that the worker is an independent contractor:
- Contractor’s business cards indicating how the contractor is in business for himself.
- Contractor’s invoices to your company on his own stationery.
- Copies of any advertisements contractor uses for his own business.
- Links to the contractor’s website.
- Written contracts for provision of services or performance of a project, one of the provisions of which covers recourse for premature termination of the contract and non-completion of the work (that is to help show there is not an at-will employment relationship).
- Emails, letters, or other documentation relating to negotiating the parameters of the work.
Let's talk about our HR Solutions for You:
Bret Brummitt
Founder
Bret started Generous Benefits in 2019 after 20 years of working inside the Employee Benefits industry with the goal to create a company that focused on improving communities through benefits. And the term Generous was no mistake, as Bret thinks in terms of broad scope ideas, processes, and technologies that can improve 1 person's life or the community as a whole. With this idea that Generous Benefits weren't just your typical checklist of commonplace insurance or wealth savings plans, but that a benefits package has room to be stretched, tailored, and curated to make a desirable long-term impact.
Bret also spends time coaching other insurance agencies with Q4Intelligence and participates with thought-provoking communities like Health Rosetta and the Free Market Medical Association to help expand his understanding and learn from others.
Oh, and he can be found around Austin running with Gilbert's Gazelles or denying his age with the Austin Metro Baseball League as a member of the Austin Blue Jays.