|All companies have people that perform work for them. Sometimes, those people
are paid a salary or hourly wage, and the company withholds taxes, pays for benefits,
and reports all this to the appropriate government agencies. To the IRS, this type of
employee is known as a "statutory employee" and the tax information is reported
using IRS form W-2.
Sometimes, companies have work performed for them by people that are not statutory employees. The IRS calls these "statutory non employees" and the tax information is reported using IRS form 1099. A non employee may be an individual or an employee of an entirely separate company.
1099 employees place a company at risk. Microsoft found this out the hard way...through litigation. You can read all the details in "Contract Professional" Magazine and on the web site of Epstein Becker & Green P.C..
Although you might think because Microsoft is a "computer" company these risks only apply to high tech companies, the truth is that any organization using "contract", "temp agency employees", or any of the other names that describe 1099 employees face the same problems. The short version goes something like this:
Way back in the middle 70's, some of the bigger "Computer Consulting" companies got together and decided that they didn't want to compete with so called "independent contractors". Prudent customers realized that independents were just as good, but cheaper, because they didn't have to support much overhead. But the big guys did have overhead, and to make sure they could charge enough to pay for it, they lobbied the IRS to investigate whether or not the independents were paying their fair share of taxes. In response, the IRS came up with a set of guidelines for determing which people should be paid on a W-2 and which can be paid on a 1099. You can read these details on the IRS web site.
About 1/3 down the page, these guidelines say "Caution: If you incorrectly classify an employee as an independent contractor, you can be held liable for employment taxes for that worker plus a penalty.".
That was the first gotcha that hit Microsoft. Being prudent, and trying to control cost, Microsoft had a small army of independent contractors...some as individuals, and some through consulting agencies...working on their products. After an IRS audit, some of their 1099 employees got reclassified as W-2 employees...Microsoft had to ante up a bunch of money in past taxes and penalties.
Then, Microsoft got hit again. The reclassified W-2 employees looked around at all the benefits the orginal Microsoft W-2 employees received (like, stock options) and said, "Hey, we should be millionaires too!". Several law suits and counter suits later, the courts agreed. More bucks.
The bottom line is...1099 employees put companies at risk. Contract Employee Corporation helps you avoid that risk.
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|Disclaimer: Note that this site is still under construction. Details related to the concept presented here may change before the site is completed.|