Independent Contractors

“Can I 1099 him?” A client question dreaded by many corporate counsel, including the most seasoned labor and employment or tax law practitioners. Translated, the question asks: “Can I legally hire this individual as an independent contractor and not an employee, which means that I will process his pay through my accounting department, not payroll, avoid paying or withholding income and other employment taxes, and then issue a Form 1099 identifying the payment as taxable income to this individual as a vendor?”

For employers, the use of independent contractors as an alternative to hiring traditional employees is frequently thought to be an efficient and cost-effective means to survive and stay nimble, especially in a difficult economy. Independent contractors come without many of the costs associated with employees, including paid vacation and sick time, health and retirement benefits, and overtime pay, but also required payments into the Social Security and Medicare systems and for Workers’ Compensation, disability, and unemployment insurance coverage. In addition, under federal labor law, independent contractors have no rights relating to union organizing, collective bargaining, or other protected concerted activities.¹ Significantly, across all these statutory schemes, there is no one test applied to determine independent contractor or employee status.²