You can use 1099 independent contractors to solve a staffing shortage, but there are strict rules you have to follow. Here’s what you need to know.
Employees and independent contractors are different things not options to choose from.
The most important thing that any business owner needs to understand when hiring employees is that you can’t just choose whether a worker is an employee or independent contractor. It also doesn’t matter if you have a worker sign a paper saying he’s an independent contractor.
What determines whether a worker is an employee or independent contractor is the tasks that worker is doing and the amount of control your business has over the worker.
If you misclassify employees as independent contractors, you can face very large fines for not paying payroll taxes and not following state and federal labor laws. If you’re not sure what you’re doing, talk to your tax advisor and legal advisor first.
When You Can’t Use 1099 Independent Contractors
These are situations where businesses commonly illegally use independent contractors.
Being a temporary worker doesn’t make someone an independent contractor. There is no minimum amount of time to work to be an employee or maximum amount of time to be an independent contractor.
For example, cashiers are typically employees. If you need an extra cashier for Black Friday or for two weeks to cover a vacation, you should hire the cashier as an employee.
Some states do have special unemployment rules for temporary workers. If you’re worried about having to pay an unemployment claim when the temp leaves, see if there’s something you need to include in your job offer to define the job as a temporary role.
Trial workers or probationary workers are similar to temp workers. If the permanent job is an employee role, a new employee generally needs to be hired on as an employee.
Again, you may be able to make a probationary job offer for unemployment or other legal purposes.
Note: While some giant corporations have contract to hire roles, they’re using armies of accountants and lawyers to bend if not outright break the rules. Smaller businesses usually can’t get away with the same things.
Saving on Taxes and Benefits
The entire point of having rules for employees is that they receive certain benefits and have payroll taxes paid by the employer. It shouldn’t be a surprise that the IRS, state tax authorities, and labor departments won’t just let you choose not to follow the rules because you want to save money.
When You Can Use 1099 Independent Contractors
Of course, independent contractor is a legitimate tax status, so there are definitely situations where you can use 1099 contractors.
Outsourcing Specialized Functions
Let’s say you used to hire an in-house accountant or marketing person but can’t find anyone know. When specialized work is outside of your business’s main functions, you can outsource it.
Outsourcing can be to a large business or to a single 1099 contractor.
Providing Unique Services
Another situation where you can usually hire 1099 contractors is when you need someone for unique services.
For example, you might be a gym that needs a personal trainer or a restaurant that wants a clown.
The key here is again how much control you have.
If you’re the gym, you can’t hire a personal trainer to follow your specific training methods and routines as a contractor. You can hire a contractor to generally teach beginner level exercises on Tuesday nights.
In many cases, it might make more sense to treat these types of arrangements as you renting space to another business. However, if you need to collect customer payments and pay the contractor, you can usually 1099 the contractor.
Handling Overflow Work
Another situation you can use contractors is when you have too much work to handle and have another business handle some of it.
For example, you might have a lawn care business and suddenly get more new customers than you can handle. Instead of turning people away, you might hire another landscaper as a subcontractor.
The key here is that who you’re hiring is legitimately another business.
If you hire someone who has no tools and has to be trained, that’s not a 1099 independent contractor. If you hire someone with his own customers to handle a few of your accounts using his own tools, that usually is a valid independent contractor arrangement.
To learn more about hiring 1099 independent contractors, check out Hiring Employees as a Small Business and 1099 Employee? There’s No Such Thing.