1099 vs. W-2 – The Ten Most Frequently Asked Questions

Question: Doesn’t contracting directly with a 1099 consultant (i.e. independent contractor) save brokerage fees?

Answer: At a time when cost cutting is crucial, all departments are looking for ways to trim expenses. But contracting with 1099s has encouraged governmental tax audits and that increased risk could lead to much higher costs. Chancellor & Chancellor’s Passthru® Program is an ideal solution to reduce costs, engage qualified consultants and comply with IRS and state tax regulations.
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Q: The contractor I want to engage has worked as an independent contractor for many years. Why can’t s/he remain a 1099 independent contractor?

A: To be appropriately classified as a 1099 independent contractor, the individual must pass the IRS’s 20 Questions and similar state requirements. Even if the individual is a dedicated contractor, if s/he will be working on site and supervised, s/he most likely will not pass the test to be classified as an independent contractor. To hire this individual for your temporary needs and comply with law, s/he should be classified as a W-2 Temporary Employee.
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Q: One of my employees who was recently laid off is needed to finish a critical part of the project. Can I bring him back as an independent contractor — 1099?

A: This situation has become common after staff cutbacks. An ex-employee’s knowledge and experience with a project may be needed to complete certain key phases of development. However, bringing an ex-employee back into circumstances similar to that which they left and reclassifying them from an employee to an independent contractor is normally contrary to the IRS and state tests of independent contractor status. In an audit, this situation will almost always end with the individual being reclassified as an employee. To ensure compliance with IRS and state regulations and still utilize these individuals, Chancellor & Chancellor will assist you to quickly hire them as a Chancellor & Chancellor employee through our Passthru® Program.
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Q: If I hire a Chancellor W-2 Passthru® instead of a direct 1099 contractor, doesn’t my company have to pay a higher amount to cover withholding taxes, etc.?

A: A 1099 contractor pays self employment taxes which include the entire amount the employer and employee share for social security tax; so the 1099 contractor actually pays more from her/his compensation in taxes than a temporary employee. Chancellor & Chancellor’s Passthru® Program includes counseling our clients to negotiate a lower rate with the temporary employee which considers these and other savings and benefits to the employee, all of which allow Chancellor & Chancellor’s Passthru® Program to reduce costs for your company.
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Q: I need a contractor for a short period. It is unlikely we will be audited during this time, so who cares?

A: Even if an audit does not occur during the contract period, the facts and circumstances of that contract exist and may arise in an IRS or state audit years later. Any inappropriate classification will be searched for by the IRS or the state during such audit. Of course, there is no such concern if you contract with Chancellor & Chancellor through our Passthru® Program for a temporary employee.
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Q: I want to hire a contractor on a 1099 basis and convert them to a regular employee later.

A: This is a red flag for the IRS and state tax agencies because the individual will receive a 1099 and W-2 form from your company, for the same services, in the same tax year. This can be used as evidence against your company in a non-compliance audit and may even trigger a tax audit. If you use Chancellor & Chancellor’s Passthru® Program you can convert at any time.
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Q: I need assistance now and a 1099 contractor can start now. My company can’t afford any delays in a start date due to employee paperwork.

A: While your company may understandably require a prospective employee to go through several departments and fill out different and perhaps duplicative forms, Chancellor & Chancellor’s Passthru® Program can process all the legal paperwork within ½ day, even as quickly as 1 hour, once we receive all the necessary information.
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Q: 1099 contractors are less expensive.

A: This is really a myth. Most contractors charge different rates depending on whether they go direct or through a broker. Most contractors take less when they use a broker’s services and more when they go direct. The difference is about the same as Chancellor’s Passthru® rate. Tell your contractor that they will be passed through an agency and ask for their lower broker hourly rate.
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Q: Isn’t the contractor more at risk of an IRS audit than my company? After all, it is the contractor who must pay the taxes.

A: If a 1099 contractor is reclassified from an independent contractor to an employee due to an IRS or state employment tax audit, usually it is because the hiring company has been audited and that hiring company is then assessed with the withholding taxes, penalties, etc. These issues are normally eliminated by Chancellor & Chancellor through our Passthru® Program.
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Q: What are the 20 Questions used by the IRS?

A: The IRS’s 20 Questions are used to determine the classification of a worker as an employee or independent contractor.