This is one of the most common mistakes agency owners make is how they classify the people who work with/for them. But should they be a 1099 or are they really an employee?
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Hey everybody! Drew McLellan here from Agency Management Institute. This week, I am coming to you from Orlando, Florida where I’m on property at Walt Disney World at the beautiful Polynesian Resort. One of the conversations I’ve been having a lot with agency owners this week is the difference between a full time equivalent and a contractor. As you all know, many of you augment your full time staff with contractors. In some cases, you’re hiring
a person for a specific job or task and it’s kind of a one and done, but in other cases and in many cases, you have a long term ongoing relationship with someone who is not run-through your payroll. You pay them as a 1099 versus a W-2 employee if you’re here in the states. And there are some very specific rules about how those people need to be classified and how you need to handle their compensation. The IRS has very specific rules around that. So to help you decide whether or not your contractor really should be considered a contractor or you need to think about a different kind of arrangement, I’ve written a blog post and I’ve included the checklist of things that the IRS goes through to determine the right classification for this person that you’re working with. And there are over 20, sort of criteria but there are things like: Where do they work? Do they work in your office or do they work in their own office or on a site of their own choosing? When do they work? Do they work when you tell them to work or do they set their own hours. So there’s a laundry list of things that we have to check the box if you will if we’re actually going to call someone a contractor. And as some of you may know, when you misclassify a person and typically it’s somebody who you’re classifying as a 1099, they really should be a W-2. There are some serious penalties and fines if you get audited either by your state’s Labor Department or by the IRS. So this is not something, at least here in the states, this is not something you should monkey around with. So head over to AgencyManagementInstitute.com and you’re going to see the www.AgencyManagementInstitute.com/1099orW2 where I’m talking right now. But go to www.AgencyManagementInstitute.com and search for “IRS rules for 1099 contractors.” and search for “IRS rules for 1099 contractors.” And if you do that, it’ll take you right to the blog post that explains exactly the criteria you should use and has a PDF document from the IRS that you can download so you can sort of check the boxes yourself to make sure that you are in compliance. All right? I’ll talk to you next week.