Does Anyone Work Here? – 1099 vs. W2 Employees
By Denise W. Branch
In an effort to keep employment costs down, many dealers have increased their use of independent contractors, or 1099 workers. These workers are not employees of the store, and therefore the dealer does not offer benefits to, nor pay employment taxes for these workers. Roles such as drivers, porters and detailers are being staffed by what dealers believe are independent contractors.
However, both the IRS and state Departments of Commerce and Revenue are taking a hard look at this increased use of 1099 workers, as millions of dollars are being lost due to unpaid employment taxes and workers are claiming unfair denial of benefits. To recoup these losses, regulatory agencies are investigating independent contractor usage, and placing significant penalties on those who have miscategorized their workforce.
To avoid such penalties, dealers should keenly evaluate a worker’s 1099 designation. First and foremost, the individual must be self-employed. The independent contractor designation is reserved for those individuals who employ themselves and are therefore responsible for reporting and paying their own employment taxes. If the worker is not self-employed, they are not eligible to be an independent contractor.
Second, workers are not independent contractors if the dealer will control what will be done and how it will be done. If the dealer has the right to control the details of the job performance, the worker should be classified an employee and not an independent contractor.
Third, independent contractors usually have a large financial investment in equipment or tools used in the performance of their duties. They may also incur unreimbursed expenses as a result of their role. Workers that are reimbursed for their out-of-pocket costs or expenses should more likely be categorized as employees.
At first glance, it might appear more fiscally responsible to limit the employee count of a dealership through the utilization of what are thought to be independent contractors. However, if an investigation yields the mischaracterization of employees as contractors, significant fines, back taxes and penalties may ensue.
As an alternative to increased independent contractors, dealers should consider utilizing a greater number of part-time employees, or hiring vendors with their own employed workforce to fill those jobs previously performed by independent contractors. And should questions remain regarding the proper utilization of your workforce, contact your dealer lawyer to discuss employment and independent contractor options.