As I write, the second quarter tax filing date approaches and it’s a good time to get your tax classification house in order. Let’s examine whether you are you a Solopreneur consultant who is on a very long assignment, or an employee?
Federal and state governments continue to focus on the proper classification of employees and contract workers. Businesses are cutting back on hiring workers who must be paid benefits, sometimes hiring instead workers alleged to be independent contractors. Officials have become suspicious. Improper classification of workers violates the Fair Labor Standards Act (FLSA).
Solopreneur consultants are not covered by federal or state wage laws; are ineligible for employee benefits such as health insurance and retirement plans; and cannot form or join a union. Our employers are not required to withhold taxes, so there can be no unemployment benefits and no one pays into our social security or medicare accounts.
The good thing is that we have 100% of our money in hand when the check arrives and that has probably saved you more than once! The downside is that we are left with a tax bill, including self-employment tax.
Businesses may be totally flummoxed about how to classify workers. The Internal Revenue Service may classify a worker as an employee and determine that s/he is entitled to participate in the company retirement plan under the Employee Retirement Income Security Act (ERISA). But state government officials may classify that same worker as an independent contractor when determining whether or not s/he is entitled to unemployment benefits.
There are tests to help distinguish independent contractors from employees. A big factor is whether the worker or the company controls the manner in which the work is performed. The more a worker is able to control where, when and how the work is performed, the more likely that an independent contractor arrangement exists. To further clarify, individuals who are free to provide services to other clients and are able to sub-contract their work are more likely to be classified as independent contractors.
Other considerations include:
- Whether the worker uses his/her own supplies and equipment to perform the work wherever it is convenient (like on a computer in a library, or a cell phone in a coffee shop)
- Whether the worker can reject an assignment without fearing termination of the work arrangement
- Whether the worker pays his/her own business and travel expenses
The above conditions would incline that worker toward classification as an independent contractor. Whether or not a worker has independent contractor or employee status has huge economic implications for both the employer/client and the W2/1099 worker. Unfortunately, in today’s job market, workers are in a vulnerable position, regardless of the government’s heightened scrutiny of possible mis-classification.
Very few Solopreneurs who ought to be classified as employees will turn in an employer who is offering steady work, particularly if the hourly rate is considered acceptable. We will put up with a few things to get a reliable check. If you suspect that you are really a W2 who is treated as a 1099 by a business that wants (or maybe really needs) to save money, look at the big picture.
Are you happy working there? Is the money good? Is the work good for your CV and the name good for your client list? Are you able to squeeze in work for other clients (with or without that employer’s knowledge)?
Without exactly letting on that you know the employer is breaking the law, you might be able to bargain for a few perks, such as less face time in the office, or perhaps access to better projects. It’s a touchy situation and you don’t want to kill the golden goose. Why not speak with an employment attorney to figure out a strategy? You don’t want to lose either a regular revenue stream or a reference. Chalk it up to what one does to get paid.
Thanks for reading,
Kim L. Clark is a strategy and marketing consultant who works with for-profit and not-for-profit organization leaders who must achieve business goals. Kim is the founder and principal of the consulting firm Polished Professionals Boston and she teaches business plan writing to aspiring entrepreneurs. Learn how Kim’s expertise can benefit your organization when you visit polishedprofessionalsboston.com.
Photo courtesy of jseliger2 [FLICKR]