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Why using 1099 independent contractors, is a terrible idea...

Risk. Risk. and More Risk.

Then Cost. Cost. and More Cost.

The 'gig based economy' is based on the premise that most anyone can become their own boss, do their own thing, during their own time, pay their own taxes, pay their own social security, be an entreprenuer, and make a better living for themselves and their family.

Now, there ARE truly gig based "jobs" that fall into this category in my opinion (Uber, Lyft etc...) that are legitimate and entreprenualistic and make total sense. With Uber and Lyft you use your own car, at your own expense, you can work any time you wish, you can 'clock out or clock in' for 15 minutes or 12 hours, whatever you like. You aren't 'controlled' as to how you do the job, you can just stop in the middle, walk off, and come back in an hour without any recourse.

Now imagine a Software Engineer working as an independent contractor. He is sitting at a customer location working alongside other software developers, he decides to stop working for a couple of hours and takes a nap in his car. Decides to eat lunch twice, goes and sees a movie at 3:00PM, and basically works when he wants and provides the software he is building on his time table, no matter how long it takes.

He wouldn't last very long at this customer site, and would certainly have his "Gig" cancelled and they would walk him off site.

For employers, there is risk to using 1099's - Here's why:

There are companies who use Independent Contractors as a way to: 1. Avert paying matching social security. 2. Dodge paying health benefits. 3. Avoid insurance costs, workers comp, liability insurance etc... 4. Limit exposure to employee lawsuits, 5 Avoid paying Overtime and 6. Make higher margins.

In my opinion, it's Cheating. It's cheating the "employee", as he will now have to pay both halves of social security insurance. It's cheating the government, because its my personal opinion that a lot of independent contractors don't pay taxes properly, it's cheating the individual by not providing workers comp insurance and other important risk mitigating factors and it's cheating companies like ours who stick to the strict letter of the law, while we build a world class organization and team!


This is the big one...did you know if you are a large company that uses a staffing firm, or 'consulting firm', and they don't pay people properly, and classify them properly (W2 or 1099), you are actually at risk for Fines, Back Pay, Back Taxes and other really bad things?

Here is the worst part....

Whoever receives 'the benefit' of the workers activities, that company is liable for any and all taxes fines benefits etc..if the tax man decides they really aren't an independent contractor and should be a W2 employee...that means:

IF YOUR COMPANY USES A STAFFING FIRM, YOU BETTER DAMN WELL MAKE SURE THE STAFFING FIRM PAYS THEIR PEOPLE AS EMPLOYEES, WITHHOLDS TAXES, PROVIDES INSURANCES, AND MEETS THE LETTER OF THE LAW....OR - Your company could have to pay back taxes, social security, benefits, overtime, fines (state and federal) and most anything else the employer should have paid. That's BAD. In fact, you could even be liable for the 1099's personal taxes, if they don't pay. (see bottom lots of scary fines and fees)


This is my take on it and my bottom line. Every person we hire is a W2 employee of our company. No 1099's. Hiring only W2's is expensive, it erodes our profit margins, it's time consuming and hard to track, having to keep up with 42 different state's regulations and laws, ACA (Obamacare) and other random regulations is a complete nightmare, and it sucks, but its for the Best! We have a better team, people feel like they are part of our company family, we have more control, our people get a tax refund instead of risk of IRS knocking on the door, we are paying half their social security tax, everyone has workers comp coverage and insurance coverages, and our customers have NO RISK.

Down from the high horse, and back to reality....Make it a Great Day!

Oh, and here is a bunch of legal stuff if you want to learn more:

Fees, Fines, and Penalties for Misclassification

Since 2011, the DOL and the IRS have jointly focused on employee misclassification, punishing even high-profile organizations like Microsoft for failing to provide proper taxes, pay, and benefits to certain employees. If your department or organization incorrectly classifies its workforce, you are at risk of accruing the following severe penalties and fees, as outlined by the IRS.

  1. If the organization filed a Form 1099 and unintentionally misclassified an employee as an independent contractor, then the employer is liable for:

  2. Federal income tax withholding: Up to 1.5% of the employee’s income

  3. FICA taxes: At least 20% of the employee’s share plus the employer’s share

  4. Unemployment taxes: These are based upon the percentage of taxes that should have been withheld

  5. Additional interest and penalties assessed by the IRS based upon the amount of the employer’s liability

  6. If the organization didn’t file a Form 1099, its liabilities include:

  7. Federal income tax withholding: Up to 3% of the employee’s income

  8. FICA taxes: At least 40% of the employee’s share plus the employer’s share

  9. Unemployment taxes: These are based upon the percentage of taxes that should have been withheld

  10. Additional interest and penalties assessed by the IRS based upon the amount of the employer’s liability

  11. If the organization purposefully and knowingly misclassifies an employee, it could be responsible for paying:

  12. Federal income tax withholding: Up to the entire amount that should have been withheld

  13. FICA taxes: Up to the full amount of both the employer and employee shares (an employer may pay less if the employee pays part of the self-employment tax)

  14. Potentially significant interest and penalties assessed by the IRS

  15. Possible criminal and civil penalties

“The IRS standards are not the only ones that employers need to analyze. State agencies apply varying and different standards, and employers also need to be aware of how courts in their jurisdictions interpret the definition of an employee. Thus, even if an employer meets the federal standards of proper classification, a state agency may deem that individual should have been classified as an employee based on the state’s dissimilar standards.” says Jennifer Simonson, Senior Vice President and General Counsel for Roth Staffing Companies. “Remember that classifying a worker as an independent consultant should be a rare exception rather than the rule. Government agencies have an interest in auditing employers because misclassification results in revenue for those agencies. When in doubt or if there is a grey area, take the conservative approach.

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