Is the 1099 Life Working for You?

Meghan recently sent me an article where Elizabeth Warren was quoted as saying that the “1099 economy” is a huge problem in the US workforce. I agree that when businesses hide behind paying someone as a subcontractor when that person is really an employee, they should be made to change the classification. It’s bad for the worker, as well as fraudulent for workman’s compensation insurance issues and payroll taxes.

But what about the new “on-demand” labor force, with people who are classified as independent contractors with Uber and Airbnb? These business owners are now creating income by sharing things they already own, and becoming self-employed in the process. Does that muddy up the definition of who is an independent contractor and who isn’t?

Think of the independent contractor relationship in the simplest way possible:  Think of the home-building process. You engage a builder to build your house, and that builder calls up his favorite carpenter. He tells the carpenter that he needs the house framed by a date in the future. He doesn’t care when the carpenter works; he doesn’t supply the hammers and nails to the carpenter; and if the carpenter needs a new ladder, he has to buy it. The builder doesn’t buy it for him. The builder pays a lump sum for the project as opposed to paying the carpenter by the hour. That’s the textbook independent contractor relationship. There is no control over the hours worked, no expectation of being in an office from 9-5, and the carpenter buys a new drill if his old one breaks. If your relationship with a questionable worker doesn’t fit this description, then you could have a problem.

Going back to our example above, using the IRS definition of an independent contractor, those new business owners in the “on-demand” labor force fit the bill. They’re not employees, paying taxes as they work. That’s where independent contractors get into trouble, from our perspective. They only know that they’ve embarked on a venture for profit, and they have no idea how their taxes are calculated or what comprises “taxable income.” This information isn’t intuitive, nor is there an instruction manual. That’s why most self-employed individuals learn lessons the hard way.

We advise our clients on these questions quite often. The taxes are very important, as are the matters of complying with both federal and state law about how you compensate someone who works for you and how that compensation is reported. Clients say, “I just wanted to start a business and make a little money. This compliance sucks.”

Amen, I say. Pull up a chair.

http://www.buzzfeed.com/mathonan/elizabeth-warren-on-rise-of-the-1099-economy-a-real-problem