1099 misclassification ?
Hi,
Firstly, thanks for the very useful site & information.
I am an IT Consultant, and have just started a contract working for a large company ("the Client"), through a chain of 2 employment agencies. The agency I have a contract with ("the agency") told me they could not do a W2, but only a 1099 or Corp-to-Corp. Currently, they are assuming they will treat me as a 1099 since "this is normal industry practice", and seem unconcerned about possible misclassification.
The agency contract specifies that I will provide services to a specific person at a specific client site, specifies a maximum working week of 40 hours, and specifies an hourly rate. It also specifies a 2-week termination clause "for any reason". No benefits are provided. The agency does not control my work, but the Client clearly does - I am expected to ordinarily work onsite, have a fixed workspace and use the Client's equipment & infrastructure. I attend meetings arranged by the Client with it's employees or other contractors & they direct my work, both in terms of output & how it is done. I travel from time-to-time & claim by expenses back from the Client through my agency.
I've read the IRS rules governing whether a person is a 1099 or W2, and am unsure of whether I really am a 1099 according to the classification guidelines. Another possible option may be to go the C2C route, although this will obviously cost me more to set-up and run.
Would be very grateful for any opinion or experience in this area to help me decide whether this is a valid 1099 & whether C2C might be a reasonable option.
Thanks.
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Employee vs Consultant
Hi Guys,
First off, "normal industry practice" isn't enough to protect anyone. Based on what you're saying you could be classified as an employee of "the Client". The good news is you are not the one at risk here. It is "the Client" that risks exposure to taxes and penalties if you are later deemed to be an employee.
Actually, if you're in California, it's more likely that the EDD would be the one to step in & review this rather than the IRS. They are pretty persnickety about employee classifications. It does seem odd to me that you could have two people working side by side and one is an employee with great benefits & the other is a consultant with better pay.
If you're hired to do a particular project/job and the leave when it's completed, then the 1099 consultant makes perfect sense. However, in these types of circumstances, you usually don't have the options to walk away from the contract.
As far as corp-to-corp vs 1099, I prefer the S-Corp option because it can save a lot in SE taxes and you can use an HRA to have your company pay for all your medical expense, not just premiums. And don't forget about the SEP-IRAs or Individual 401(k)s, which apply to sole proprietors too. But you need to consider your own situation.
Hope this helps!
L:)
HRA & S-Corp
Linda,
I have a question, how can you recommend an HRA for S-Corp owners? The resources I have checked indicate that the amount of the HRA still have to be included in that owner's W2 (not subject to SS or MC taxes). So I guess it would lower the business income, but the net effect would still be the same to the owner. The W2 wages would increase by the amount of the reimbursement. Am I missing something?
HRAs for S-Corps
Yes!!! :)
Although the HRA reimbursement is included on your W-2 from your S-Corp, on your personal income tax return you can deduct that amount on Line 29, Self-Employed Health Insurance Deduction of your 1040. So it goes into income on Line 7, Wages, and out on Line 29. The net effect is the S-corp pays for your health expenses and you pay no income taxes on it.
If you just tried to deduct your health insurance costs on your Schedule A you can only deduct the amount above 7.5% of your AGI.
The other advantage of the HRA is it can reimburse you for more than just the insurance premiums. Deductibles and out of pocket expenses can also be reimbursed by the company.
And the HRA gets around IRS Headliner 163 which says S-Corps can only deduct premiums if the insurance policy is in the company's name. This is difficult to impossible if the owner is the only employee as some state insurance regulations require that business policies must cover more than one individual.
Oh, and because it's reported as wages it boosts your salary if the IRS ever reviews returns to see if the owner/employee is paid a "reasonable salary".
I think the HRA is a great tool for S-Corps.
L:)
Employee vs Consultant
Firstly, many thanks for the reply - I suspected that this might be the case, but it's certainly interesting to see it confirmed.
Would this risk exist if my employment relationship with the agency were W2 ? Also, is the agency at risk here in any way (apart, presumably, from possibly incurring the displeasure of the client) ?
Thanks !!
Same boat
Wow, what a great site.
I'm in the exact same boat as ITConsultant. I just got an offer for a contract job going through a recruiting company. I can do W2, 1099 or C-to-C. This will be my first contract job. I've done FT for the past 20 years.
What I don't understand is how any contract job through a recruiter could ever be considered 1099 (by the IRS) if the ultimate client is controlling everything (from the IRS definition of "control"). This contract is pretty much identical to the one described by ITConsultant, where I have pretty much no control. So, how can the reruiting company offer me 1099?