Question
I work for a woodshop that currently has around ten employees. Most employees are on the books but about four are 1099. What are the benefits of each to the employer or employee?
Forum Responses
(Business and Management Forum)
From contributor S:
It's really not about benefits of being an employee or 1099. The IRS has rules that determine whether you are an employee or an independent contractor. If you are an employee, the employer pays all employment taxes, workers comp, etc. If you are an independent contractor, you normally get paid more, but you normally need to be licensed/insured, you need to pay for your own workers comp (if you want it) and you pay the full amount of the self employment tax. Also filing your taxes become a little more complicated. So the real benefit goes to the employer when he/she pays on 1099, which is why many do it illegally. In a cabinet shop most positions wouldn't qualify for independent status. Usually installer is the only one.
If you plan on starting your own business some day it would benefit you to get your own liability insurance and worker’s comp. Not only can you ask your employer for more money, you can then start doing work on your own - homeowners or contractors. But I would check with your employer he might take it as you are going to quit. I don’t know how long you have been with this company or well you know your boss. A boss can be funny about this stuff sometimes.
In my opinion, this is almost always a mistake. Problems arise most frequently when you pay a person as an independent contractor for a period of time, business slows, and the contractor realizes that they can't collect unemployment. More rarely, but much more seriously, it arises when a contractor is injured, get's fixed at the hospital, and then the hospital goes looking for the responsible party. Both Workman's Comp and Unemployment Insurance are cheap for what you get in return. The second keeps guard for spurious claims, and covers what needs to be insured; the first eases the pain of the sad, but necessary business of laying people off when business slows.
Our company regards a plumber who comes to fix the toilet as an independent contractor. Otherwise, if you work here, you're an employee. We're going to deduct taxes and we're going to include you in our insurance audit. If you come here as an independent contractor (to fix the roof) better be prepared to show me your workman's comp policy - otherwise, it's a no-go.
On the other hand, he invoiced me for all payments, could take off when he wanted, frequently worked outside of the shop with his own tools, and had his own liability insurance as a sole-proprietor carpenter, so on these counts we met the IRS requirements for independent contractor and 1099 status. I guess it would be accurate to say that most of the time he was technically an employee, but some of the time he was independent. If he was seriously injured in my shop, however, any lawyer could probably take me to the cleaners by arguing the one side of the picture (he was more an employee than not and I should have had a worker’s comp policy for him). These issues are not to be taken lightly; I myself know personally how devastating a hand injury can be, and this guy has little kids! But as I said, it was his preference, and I went with it. It's history now, as I lost him when business slowed early this year.
A couple points of clarification about insurances (and I welcome others who are more sure about this to contribute). Sole proprietorship is a form of business ownership/operation. As a sole proprietor, I can have no employees or fifty. Other business formats include corporation, s-corporation, and LLC (limited liability corporation). Each has different taxation and liability pros and cons, among other things. Some posts have suggested that any independent contractor (someone being issued a 1099 as in the original post) should have workers comp insurance (which is medical and disability coverage in the event of injury on the job) and pay into his state's unemployment compensation fund. But a sole proprietor (as best I understand it) is not eligible for either worker's comp insurance (also typically issued by the state) or allowed to contribute to the state’s unemployment compensation fund (maybe it varies by state).
Instead, a sole proprietor relies on personal medical insurance in event of injury, and when work runs dry, well, his income dries up too. By converting a sole proprietorship to one of the other three business forms of incorporation, all this changes because the "owner" technically becomes an "employee" of the business entity, and can receive some of the same benefits of an employee. Structuring a business as a corporation is a legal process requiring a lawyer and costs a little money. The four guys in the original post, and the thousands of others like them, are almost all self-employed sole proprietors. If you're operating a full-fledged business as I am, you surely need to have a business liability policy. If you reach the point of needing to hire someone, you're safest bet is by the book - proper tax withholding, unemployment comp, and workers comp as required by law. But those last two won't be part of your safety net as a sole proprietor, as many of us are painfully aware lately.
