Process Serving: 1099 Independent Contractor vs. Employee
- May 05, 2013
- by Laura J. Hazen
- Business Tips
Updated 5/21/2014: The below information was updated to include an outline from a practicing attorney. Supplementary information was also revised.
Editor's Note: Information not denoted as provided by Laura J. Hazen was provided by ServeNow staff.
Many process servers operate as independent contractors, and a number of process serving agencies might be confused about whether or not some of their staff qualify, in the eyes of the IRS, as 1099 independent contractors or employees. Below you will find clear, tax-related definitions of 1099 independent contractors and an outline of helpful information furnished by a practicing attorney.
What is an Independent Contractor?
A 1099 independent contractor is a business owner (self-employed) or contractor who provides services to another business besides their own and usually does so for multiple businesses.
Who hires an Independent Contractor?
A business owner who is hiring or contracting workers for services separate from their full-time and part-time staff.
How can a business owner determine the difference between an independent contractor and an employee?
According to the IRS, there are three categories that help employers decide whether their staff are employees or 1099 contract workers, but there is no set number of qualifications a person must meet or not meet to be one or the other. If both employee and employer are unsure of the employee’s status they can file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS.
The first category is behavioral and depends on whether or not the business has full control over what the worker does and how he or she does that work. The less control you have over an employee, the more likely they are to be a 1099 contractor.
The second determining factor is financial and depends on things like whether or not the employer reimburses the employees' expenses, whether or not the employer provides the tools necessary to complete the job and how the employee is paid. A 1099 contractor will provide their own tools, will usually be exempt from reimbursements and will be paid per job, not on a regular basis.
The last thing to consider when deciding if a hire is an employee or a 1099 worker is the type of relationship the business has with them. Is the work they do a key aspect of your business? Will the relationship continue or is it a one-time occurrence? Will the new hire receive benefits? A 1099 worker will usually be hired once and may be providing a service that is not vital to the inter-workings of the business hiring them. A 1099 worker will not receive benefits, a regular employee will.
Employee vs. Independent Contractor Outline
The below outline and information was provided by Laura J. Hazen, attorney and co-founder of H&K Law, LLC
I. Employee vs. Independent Contractor
Key test: The extent to which the employer controls the individual doing the work. This is an individualized, fact-intensive, subjective determination
A. Fair Labor Standards Act (FLSA), 29 U.S.C. § 201 et seq
The FLSA exempts independent contractors from its overtime pay and minimum wage provisions.
Factors outlined by U.S. Supreme Court as significant to the analysis of whether an individual is an independent contractor or an employee, including:
- The extent to which the services rendered are an integral part of the principal's business;
- The permanency of the relationship;
- The amount of the alleged contractor investment in facilities and equipment;
- The nature and degree of control by the principal;
- The alleged contractor's opportunities for profit and loss;
- The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor; and
- The degree of independent business organization and operation.
Immaterial factors, according to the U.S. Department of Labor:
- Where the work is performed;
- The absence of a formal employment agreement;
- Whether the individual maintains licenses with State/local government; and
- The time or mode of payment.
B. Internal Revenue Service Standards
This is one of the most common investigations conducted by the IRS. Why? If an individual is inappropriately classified as an independent contractor then the company is not contributing to social security or withholding appropriate taxes from that individual's compensation.
IRS generally looks at 20 factors in making a determination of whether an individual is an employee or an independent contractor:
- Must comply with employer's instructions about the work;
- Receives training from or at the direction of the employer;
- Provides services that are integrated into the business;
- Provides services that must be rendered personally;
- Hires, supervises, and pays assistants for the employer;
- Continuing working relationship with the employer;
- Must follow set hours of work;
- Work full-time for an employer;
- Works on the employer's premises;
- Must do work in a sequence set by the employer;
- Must submit regular reports to the employer;
- Receive payments of regular amounts at set intervals;
- Receive payments for business and/or traveling expenses;
- Rely on the employer to furnish tools and materials;
- Lacks a major investment in facilities used to perform the service;
- Cannot make a profit or suffer a loss from his or her services;
- Work for one employer at a time;
- Does not offer his or her services to the general public;
- Can be fired by the employer; and
- May quit work at any time without incurring liability.
None of the above factors are controlling, and there is no mathematical weighing of the factors.
C. Why is the appropriate classification important?
- Liability, general (Insurance policies usually require independent contractors to carry own policy)
- W2 vs. 1099 tax (penalties for faulty/insufficient withholding)
- Unemployment Insurance
- Workers Compensation Benefits
- Avoid claims for lost wages and overtime
D. How to protect yourself or your business:
- Evaluate position accurately, not hopefully
- Seek HR/legal opinion
- Temporary Worker Trap
- Sign contracts with the correct language
About the Author:
Laura J. Hazen is a co-founder of the law firm of H&K Law, LLC. In her employment practice, Hazen provides day-to-day advice and coaching to public and private companies on various employment matters. She also has an active litigation practice where she concentrates on representing business in all aspects of complex business and employment disputes. You can contact her by email at [email protected] or by phone at 303-749-0649.
Author's Note: We have developed this outline to provide general information; however, some of the information outlined may need to be tailored to the specific circumstances of each position. Thus, this should not be used as a substitute for advice of competent counsel.
This article is intended as a general discussion and information on the topic covered and is not to be construed as rendering legal advice. If legal advice is needed, you should consult an attorney. This article may not be reprinted or reproduced in any manner without prior written permission of the author.
Laura J. Hazen also gave a presentation at the 2014 PACES Seminar in Denver. Her presentation is available for purchase here: Employee or Independent Contractors: Who is What and Why Do I Care.
Also from Laura Hazen