THE WORKPLACE When contractors are really employees

Some employers prefer independent contractors to employees.
WASHINGTON POST
If employers could write organizational fantasy novels, a key character would surely be the Perfect Worker. He would labor long hours without complaint, talk to his fellow droids only about the task at hand (certainly never about unions), cheerfully squirt Go-Gurt into his mouth instead of breaking for lunch -- and all his earnings would be reported on IRS Form 1099.
That way, there would be no Medicare and Social Security taxes to pay, no unemployment insurance premiums, no medical benefits, no 401(k) obligations. Guilt-free layoffs. Ah, we're flapping our arms on corporate cloud nine now.
Some employers have come wickedly close to fulfilling this dream with the "1099 employee."
The name derives from the 1099-MISC, the IRS form companies use to report money paid to independent contractors, as opposed to W-2s, used to report payments to employees. In other words, there is no such thing as a "1099 employee," no matter how badly some tightwad employers wish it were so. There are contractors. There are employees. There is nothing in between.
Contradictory description
Yet, an increasing number of people describe their work situations using this self-contradictory term. The Labor Department counts 8.5 million people as independent contractors.
Melissa Mauro of Warminster, Pa., said she remembered thinking her last contracting job several years ago was "a little weird." She didn't know anything about regulations governing such arrangements when she picked up work for a medical publishing company where she had once worked on salary.
She did the exact work as a contractor that she had done as an employee, except now she was paid by the article and set her own hours. The work was highly skilled, she said, and it could be done only by someone trained by the company. Not surprisingly, all the "contractors" were former employees, who were now paid less for their labor.
Mauro probably was a legitimate contractor, if a grossly underpaid one.
Most benefits from incorrectly classifying someone as an independent contractor accrue to employers. They no longer worry about payroll taxes or workers' compensation premiums or providing benefits such as health insurance. Many labor laws, such as those protecting workers from harassment and discrimination, no longer apply.
Some benefits to workers
Workers can see some benefits, such as the ability to deduct the cost of a home office. But overall it's much riskier. For many new contractors, the "knee-jerk reaction is, 'Ah, freedom,' " said Ron Wainrib, a Boston-area employment attorney and editor of ContingentLaw.com. "But with that freedom comes responsibility."
The reason the employers save money on payroll taxes is because they are offloaded to the worker. Employees split the burden for their Social Security taxes evenly with their employers; contractors are responsible for the whole load.
Contractors are also responsible for their health insurance and retirement savings, and they must budget for sick and vacation days. To cover this gap, savvy contractors charge at least twice what they would be paid hourly as regular employees.
Issue is control
So how can you tell if you are a legitimate contractor? "It comes down to control," said Sam Serio, an IRS spokesman.
If your employer tells you where, when and how your work must be done, you're an employee, no matter what IRS form your income is reported on. If you work continuously for an indefinite period at the same employer, again, you're an employee.
Contractors are hired for a specific task. Aside from a deadline, they generally have sweeping latitude over how the work gets done. Contractors can negotiate their fees. The IRS has a lot more information on this topic on its Web site, www.irs.gov; look for Publication 1779.
What if the IRS decides your employer got it wrong and you're not really a contractor? The employer might have to pay all those back payroll taxes, along with substantial penalties and fines. Workers might find deductions disallowed, meaning they also owe taxes.
So, make sure you understand the rules before you take on contract work -- and consult a tax expert.
"Don't necessarily think the company knows more than you do about the regulations," Mauro said.