1099 Contractor or W2 Employee
In this article
- Per the Colorado Department of Labor
- Further explanation
- Do you have a Written Contract
- Why a contract alone isn't sufficient
- How does the IRS look at the relationship
- Outside Resources & Links
Per the Colorado Department of Labor
"Under Colorado Law, an individual is presumed to be in covered employment unless and until it is shown that the individual is free from control and direction in the performance of services, both under contract and in fact, and that the individual is customarily engaged in an independent trade, occupation, profession or business related to the work performed."
Did you get that?
In short, the State of Colorado would require you to pay the worker as an employee until you can establish otherwise. That would include potentially requiring you to withhold employee taxes and pay employment taxes ranging from 7.65% to 15% (Unemployment & matching Social Security/Medicare).
Do you have a Written Contract?
If you have a contract that meets ALL of the requirements of the law, the worker could be properly classified as an independent contractor. However, a contract alone will not provide you security against a claim by a worker and/or under a government audit. While a contract may shift the burden to the worker or auditor to prove the relationship; either would still have ample opportunity to prove their case.
Why a contract alone isn't sufficient?
Per the State of Colorado, "To create the presumption of an independent contractor relationship, the writing or contract must contain the following clauses that both parties agree to and that, in fact, both parties act accordingly.
- The company does not require the individual to work exclusively for the person for whom services are performed; except that the individual may choose to work exclusively for the said person for a finite period of time specified in the document;
- The company does not establish a quality standard for the individual; except that such person can provide plans and specifications regarding the work but cannot oversee the actual work or instruct the individual as to how the work will be performed;
- The company does not pay a salary or hourly rate but rather a fixed or contract rate;
- The company cannot terminate the work during the contract period unless the individual violates the terms of the contract or fails to produce a result that meets the specifications of the contract;
- The company does not provide anything more than minimal training for the individual;
- The company does not provide tools or benefits to the individual; except that materials and equipment may be supplied;
- The company does not dictate the time of performance; except that a completion schedule and a range of mutually agreeable work hours may be established;
- The company does not pay the individual personally but rather makes checks payable to the trade or business name of the individual; and
- The company does not combine their business operations in any way with the individual's business, but instead maintains such operations as separate and distinct.
In addition to including the above factors, the contract must contain a disclosure, in type which is larger than the other provisions in the document or in bold-faced type or underlined type, that the independent contractor is not entitled to unemployment insurance benefits unless unemployment compensation coverage is provided by the independent contractor or some other entity, and that the independent contractor is obligated to pay federal and state income tax on any moneys paid pursuant to the contract relationship."
How does the IRS look at the relationship?
Similar, but not always 100% identical, the courts have used facts in these categories in deciding whether a worker is an independent contractor or an employee.
- Behavioral Control: Whose determining how often, when or where to do the work? Whose determining what tools or equipment to use? Whose determining what assistants to hire to help with the work? Who determines where to purchase supplies or services?
- Financial Control: Is the worker being reimbursed for their expenses? Does the worker have an opportunity for Profit or Loss from the contract? Has the worker made a significant investment in the work? These all would show proof that the worker is in the business of providing these services to others & would be an independent contractor.
- Relationship of the Parties: Is the worker receiving an benefits; such as insurance, pension, or paid leave? What does the written contract provide in helping determine what both parties intend?
Outside Resources & Links
- Colorado Dept. of Labor & Employment: https://www.colorado.gov/pacific/cdle/independent-contractors
- IRS Resource Page: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Independent-Contractor-Self-Employed-or-Employee
- IRS Publication 1779: Independent Contractor or Employee: http://www.irs.gov/pub/irs-pdf/p1779.pdf