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W2 but should be 1099 Illinois

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  • W2 but should be 1099 Illinois

    I understand that the IRS and state unemployment departments have an incentive to make sure that W2 employees are not incorrectly classified as 1099 subcontractors. But what about the other way around?

    I have subcontractors that I give occasional work to, typically about 0-20 hours per month. Two of the subcontractors (out of approx 10 over the years) were not comfortable with 1099 because they didn't want to bother with taxes, and asked if they could be a W2 employee instead, and so I let them, even though they would not have passed the W2 employee test.

    Is there any problem with doing this? Could the IRS or State argue that all of my (similar job function) subcontractors should now become W2 employees? And if this happened, can I counter argue that actually it's the other way around, that none of them should be W2 employees, and if they have a problem with it I'll just convert them all to 1099?

  • #2
    If they are classified as employees, you must take out their taxes for them, pay their unemployment, disability and worker's comp insurance and are responsible for their acts while working. If they truly are a sub, you should not have them as an employee - too much liability.
    I am not an attorney, and don't play one on TV. Any information given is a description only and should be verified by your attorney.

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    • #3
      Yes, I take out all the taxes as I do for my other "real" W2 employees. And I'm not too worried about these particular "should be 1099 but are W2" employees being able to collect unemployment against me. I'm asking about if this could open the door for either the IRS or the State unemployment agency to claim I have to reclassify all the other subcontractors as W2 employees, just because I'm doing a "favor" for some of them.

      To be fair, I would probably pay any of the subcontractors as W2 if they wanted it.
      Last edited by mark42; 07-01-2011, 12:23 PM.

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      • #4
        Maybe two issues.
        - Just how sure are you that any of these workers meet the statutory legal requirements for independant contractors? This is a good thing to be very sure of.
        http://www.dol.gov/whd/regs/compliance/whdfs13.pdf
        http://www.irs.gov/businesses/small/...=99921,00.html
        - The other issue is do you offer medical or retirement benefits subject to the ERISA law? If so, have you taken a VERY close look at the exact wording of the plan documents. The chances that these documents are written in such a way as to exclude these workers you are "allowing" to be employees is not good. And there is a much smaller but non-zero chance that this could be an issue for other benefits.
        "Reality is that which, when you stop believing in it, doesn't go away".
        Philip K. **** (1928-1982)

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        • #5
          Thanks DAW. I am fairly certain of their independent contractor status. I currently don't offer any benefits to my other 3 full time W2 employees so that doesn't come into play. Though even if I did, I would likely have something in place that would preclude benefits for employees who work less than say 20 or 30 hours per week. The subs typically average only a few hours per week for me.

          Thanks for the links- I was unfamiliar with the DOL document.

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