Below are some of the benefits and risks you incur in using 1099 contractors:  

     The Benefits:
     There are many valid reasons to hire contractors:
  • Accomplish a specific assignment, limited in duration and scope (such as short-term recruitment) 
  • Obtain specialized skills and expertise not available within the company (such as recruitment) 
  • You do not incur legal issues related to discriminatory hiring practices and wrongful discharge
  • You avoid overhead for employee benefits i.e. retirement, profit sharing plans and payroll overhead 
  • You avoid additional administration expenses associated with withholding and reporting State and Federal taxes 
  • There is no long-term employee commitment
  • Reduce organizational impact of setting up and shutting down projects 
  • Replace expensive long-term employees with highly skilled team members (recruiters)

     The benefits associated with the use of a 1099 contractor as means of temporary  

     help are often more than off-set by the significant risks to your company. These   

     risks have greatly reduced the use of 1099 contractors in recent years.

     The Risks:    

  • A 1099 contractor which you legitimately retained as a contractor may claim, sue and win: unemployment insurance, disability payments, workers compensation, employee benefits, stock options, profit sharing and retirement benefits by claiming they were actually an employee 
  • The contractor will claim you misclassified them as contractors when they were true employees and you did so to avoid paying the applicable taxes and benefits 
  • One or more government agency will then conduct audits seeking to recover uncollected fees, taxes and penalties (which can be substantial) 
  • If the IRS finds you have misclassified employees, as independent contractors you may be responsible for paying all withholding taxes, plus interest, even if the workers already paid the taxes themselves. In addition, the IRS may impose financial penalties on the company totaling thousands of dollars. Adding insult to injury, the EDD and other government agencies may impose additional penalties to those levied by the IRS 
  • You are at the greatest risk of being audited by the Internal Revenue Service or the Employment Development Department but other agencies may become involved such as the Workers Compensation Appeals board, Immigration and Naturalization Service, U. S. Department of Labor and the State Labor Commissioner 
  • The IRS has distilled the findings of hundreds of rulings and court cases into a list of twenty common law factors that can be used on a case-by-case basis to determine whether a contract worker is actually an employee. The IRS list of twenty common law factors is more comprehensive than the other agencies' lists, and is the most frequently consulted by hiring companies.

     Please see the section on "The 20 Common Law Guidelines" from the IRS or visit this   

     website at: http://www.edd.ca.gov/taxrep/de38.pdf .  

     Complete Text (1987-1 CB 296). This information is not meant as legal advice please 

     consult a legal or tax advisor for advice concerning specific questions and situations.

Bay Area Recruiters, Inc.

Northern California / Bay Area

Phone:  650.465.9322

E-mail us:  info@BARecruiters.com

2010 Bay Area Recruiters, Inc.  All rights reserved.