Some business owners who want to save on employment taxes treat employees like contractors and 1099 them rather than set up payroll with a W-2. BEWARE!!
I certainly understand you want to save money in this area of your business, employment taxes, workers comp, unemployment, etc… can be a pain AND expensive. However, just because you ‘say’ they are a sub and give them a 1099, doesn’t make them a sub-contractor. Basically, if they walk like a duck, act like a duck and look like a duck… they’re a duck!!! I’m sorry. Here are the two concerns we need you to know about:
First, the IRS is cracking down on this practice. As reported in the New York Times “Federal and state officials, many facing record budget deficits, are starting to aggressively pursue companies that try to pass off regular employees as independent contractors.” The IRS consistently warns taxpayers that if you are caught paying ‘employees’ as ‘sub-contractors’, you will pay stiff penalties on top of the taxes and interest owing for payroll withholdings that should have taken place. Here is a helpful article posted on irs.gov that can explains the distinction:
Second, is the asset protection/liability issue; a Workers Compensation claim could be worse than the IRS. If you are paying an ‘employee’ as a ‘sub-contractor’ and not carrying Workers Compensation Insurance, who do you think is going to be liable if they get hurt on the job? That’s right!!! – YOU. More than likely, you will also be personally liable and your corporate veil won’t protect you either. This is because in the eyes of the Court, you should have known better and were acting recklessly or negligent in not carrying insurance.
PLEASE be careful and please know that between the two firms we can set you up with the payroll service, 1099 system, then the employee or sub-contractor agreements. Please give us a call to discuss this issue with your accountant at Kohler & Eyre or an attorney at KKOS Lawyers. Please call 888-801-0010 to make an appointment.