What can you say to consultants who don’t qualify as independent contractors (ICs) but insist on being treated as such? This has always been a sticky problem. The consultant insists on being classified as an IC and s/he is the very best choice for your project; however, the project or the consultant simply does not stand up to the scrutiny of an IC qualification.
To protect your company you need to put him/her on a payroll — either yours or with a company like Collabrus. Government enforcement is more aggressive than ever before and if a single consultant is found misclassified, an enforcement agency will assume other workers are also misclassified and investigate all consultants in your company for the full statutory period. The resulting tax assessments, fines and penalties can be very expensive. These issues can come up several years later from a variety of sources including unemployment claims, harassment complaints, routine tax audits, injuries on the job, and even civil lawsuits.
A misclassification finding by the IRS can also have negative consequences for the consultant. The pre-tax, self employed retirement plan could be disallowed, which may lead to an income tax audit of the consultant with additional taxes, penalties and interest assessed for prior years.
There are many clear advantages for the consultant being a W-2 over a 1099. This is especially true if there is a third-party vendor like Collabrus acting as the employer-of-record. For example, ICs injured on the job (car accident, slips in the break room, carpal tunnel, etc.) are on their own for medical treatment. Employee-consultants are covered for these issues.
A W-2 consultant can negotiate his/her own assignment parameters, pay rate, and work schedule; however, quality third-party vendors can help negotiate the legal terms and execute the contract. These vendors can also provide an efficient on-boarding process that shortens the start-to-work time and offers a full-range of employee benefit options to help attract and keep the best, senior-level consultants.
Among these benefits are the following:
• Regular pay schedules. The consultant can count on being paid timely by compensation plans that include: salaried, hourly, fixed project price, or deliverables-driven options
• The payments can be made in semi-monthly paychecks or direct deposits
• Proper employer payments and withholdings are made and requisite taxes paid, so on April 15th there are no surprise penalties for not depositing sufficient amounts during the year, a common predicament for many consultants
• Coverage for general liability; errors and omissions; employer professional liability; and worker’s compensation insurance
• Medical, dental, and vision insurance, with the option to continue coverage through COBRA when the engagement ends
• Expense reimbursement with an “accountable plan” so consultants can continue to cover business expenses on a pre-tax basis
• A matching 401(k) plan
• A Section 125 pre-tax flexible spending plan
• A Section 132 commuter benefit plan
• Pre-tax dependent care plans
• Unemployment insurance coverage
• Disability insurance coverage (in California)
Employee-consultants, managed by a third-party provider, can also enjoy the continuity of a single year-end W-2 for all assignments, and are able to take their benefits plan with them to their next project.
Disclaimer: Given the general nature and context of this article, the material presented should not be relied upon or construed as either tax or legal advice. For specific information on recent developments, the effects of particular factual situations or of a particular law in regards to your business, or before making decisions based upon this presentation, you should obtain the opinion of a qualified expert.