1099 Employees Don't Exist

I wish I had a dollar for every time I have heard a business owner say, "He's a 1099 employee." That  statement alone highlights the common misunderstandings business owners have regarding the differences between independent contractors and employees. But the importance of understanding these issues has increased as Governor Culver recently announced he supports an initiative to crack down on misclassification of independent contractors.

Many businesses make the mistake of treating employees as independent contractors so they can save money on taxes, red tape and benefit coverage. (Hence, the reason the state of Iowa is cracking down. Every tax dollar is important in this economy). The risks associated with this approach open the business up to fines, wage and hour lawsuits, tax penalties and lack of insurance coverage.

Sometimes businesses treat employees as independent contractors because they fail to fully understand the distinction between the two categories. The most important difference is whether or not the employer has a right to control the work. Other factors, such as where the work is performed, who provides the equipment, how payment is made and if there are set hours, also play an important role. 

Generally, an "employee" is someone whose manner of work the employer has a right to control, even if the employer does not actually exercise that control. True employees are W-2 employees because of the W-2 form issued to them for federal tax purposes.

As I said, independent contractors are not 1099 employees. You never want to refer to an independent contractor as an employee. An independent contractor is someone you engage to perform a certain task but whose manner of work you do not have the right to control. It is often helpful to have a contractual relationship with the independent contractor to provide support for such a position.

The issues regarding the classification of independent contractors are more complex than discussed here so be sure to consult an employment and/or a tax lawyer if you have any questions.