NC Cracking Down on 1099 Workers

Last month, North Carolina governor Roy Cooper signed legislation that creates an office within the North Carolina Industrial Commission to investigate companies who might be misclassifying employees as contractors and to discourage the practice.

This legislation doesn't change the rules regarding how to go about evaluating whether your workers are legitimate contractors or are really employees that you've misclassified as contractors. What's different is that a separate office is now funded with the sole purpose of ferreting-out those the government considers to be abusers of this practice.

Some of my workers prefer to be paid by 1099.  Why does the state care? 

It's all about the money! When you pay your employees on a Friday, you immediately send a check to the government for income taxes withheld and other obligations like social security and unemployment tax. An employee who makes $10 per hour may gross $400, but they actually take home less because you withheld taxes. When you pay your 1099 worker the same $400, there is a contractual obligation, or at least an implicit understanding, that the 1099 worker will file his or her own taxes. But even if they do file quarterly, the government would prefer to have its money every pay day. The reality is, most laborers paid via 1099 file at year-end, at best. Many never file at all. 

I save a lot of money by paying workers via 1099 rather than W-2.

While employers who either mistakenly or intentionally pay workers by 1099 do gain some short-term cost advantage over their compliant competitors, it is generally not as much as they think. For instance, the company's workers comp carrier will often roll those 1099 workers for whom the company can't produce a workers comp insurance certificate right into the company's premium during their annual or semi-annual audit. They've paid out the employee-paid portion of the income taxes to the worker in the form of gross wages, so there's no savings there. They have saved on some of the matching taxes like FICA, SUTA and FUTA, as well the company-paid portion of employee benefits the worker might have been eligible for. But the potential costs associated with being found to be out of compliance are quite high - steep fines, back taxes (even if they worker paid them), and jail time in extreme cases. Seems like a bad risk-reward scenario to me.

What should I do?

Make sure any legitimate subcontractors you use to help during periods of peak demand have an executed subcontract agreement with your company and you have their certificates of insurance on file. Note: many one-person operators will tell you the state doesn't require workers comp on business owners, but if that "business owner" is in the field performing work on your behalf and your work comp carrier sees them as a risk, you're perfectly in your rights to say, the state might not require it but we do...

Second, identify any workers that don't really meet the IRS definition of a contractor and either find a temp agency partner to run them through or hire them as employees.

If you need assistance determining who meets the definition and who doesn't, contact The Davidson Group and we'll be happy to consult with you.