Who Is a Subcontractor or an Employee? When to 1099 or W2

I just came from a meeting with a Certified Public Accountant. He gave me a guideline to follow when considering one an “employee” (W2) or “subcontractor” (1099). VERY eye opening. This was sent to one of his clients, by the IRS, when a subcontractor filed for unemployment insurance when the temporary job was over. So for all those that aren’t taking out disability insurance, workers compensation, insurance, payroll taxes, FICA, listen up!

  • A copy of any contract on which the services were obtained. If there is no written contract, please furnish the substance, in detail, of any oral agreement.
  • Where did the individual work? Were they required to work on your premises?
  • Was the individual in an independently established business? If so, did the individual advertise in the classifieds, or in local newspapers, craigslist, website? If possible, provide business cards, stationery, insurance certificates, ect.
  • Could similar services be performed for others in a competitive business? Is so, furnish details regarding for whom such services were performed and whether or not they were performed during the same period services were performed for you. Are they working else where?
  • Could work assignments you offer be refused? Under what circumstances could services be terminated?
  • Was there a requirement to devote a specific amount of time to the services performed for you or was the time required to perform the service left to the individual’s discretion?
  • Was the individual covered under your liability insurance, workers compensation or disability insurance?
  • Were deductions made from the earnings for social security and income tax purposes?
  • Who provided tools, supplies or equipment?
  • When services were not performed for you, due to illness, ect, who furnished a replacement? Must permission be requested for time off?
  • Who set the rate of pay and what was the basis of compensation, this is, hourly or weekly, or were the bills submitted according to the terms of the agreement? If bills were submitted, please furnish a copy or sample of such a bill.
  • How were the services obtained? Furnish copies of any advertisements, applications, ect.
  • Did the individual have to call in absences?
  • Were there any requirement to report at established times and work certain hours, for example, 9:00-5:00, 8:00-4:00, ect?
  • Did you supervise or review the individual’s work? If not, how did you insure the work was being done satisfactorily? If the work was not satisfactory, who was responsible to the customers?
  • Did you provide reimbursement of expenses, and what fringe benefits did you provide?
  • Did you provide training or required attendance at training sessions?
  • Could the individual subcontract work?
  • How free was the individual to develop their own design concepts?
  • Did the individual deal directly with your clients at any stage of the project to discuss project requirements?

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If you answered mostly NO to ALL of these questions, you would 1099 them. They would be considered a subcontractor. If you are unsure and answered YES to ANY of these questions or can’t provide proof or otherwise, you would W2 them. They would be an employee and you would have to pay all the necessary taxes and deductions required by the Labor Department. Each state has their own labor requirements. If they find you have not followed the guidelines, you would be penalized THOUSANDS of dollars per employee, have to pay all back taxes, compensation, insurance from first day of employment with penalties and interest from beginning of your business. If they get hurt, you’re responsible for ALL their medical expenses.

This is for NY state. Your own state would have their own guidelines so look it up and be informed. When you are just starting out, it’s best to follow the guidelines when it comes to hiring employees and paying the necessary insurances and workers compensation. It’s all part of business and your CPA will help with all of this as he is licensed in your state to make sure you are on the right track. Ignorance will not get you out of any fines or penalties.