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Employment Law/Converting 1099 employees to W-2 employees

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Question
My company is considering making direct payment arrangements for our sub contractors that are 1099. She wants to convert them to W-2 Employees. Can you tell me what the procedure would be for making this shift and if perhaps there is a check list or information sheet that runs down all the documentation and information you need to accomplish this within State and Federal Law? We are in the state of Texas.

Thank you so much,

Christine Lette

Answer
Christine - There is one potential pitfall with converting people from independent contractors to employees:  the question of whether they should have been employees all along rather than independent contractors.  

Both the Labor Department and the IRS have rules regarding who can be a 1099 contractor and who must be an employee.  Generally speaking, independent contractors keep their own schedules, often work for more than one company, provide their own tools and insurance, and cover their own unemployment/workers comp/payroll taxes.  Employees are at work according to the employer's schedule, provide work that is essential to the operation of the employer, and have all taxes or insurance paid by the employer.  

If a 1099 individual should have been treated as an employee, the employer can be required to pay the taxes and insurance for the person retroactively for two or three years.  That's the pitfall I mentioned above.  If you determine that these "contractors" should have been employees, you might want to have them sign a waiver of the right to make a retroactive claim for overtime, taxes, etc.  It isn't legally binding, but it could discourage litigation against your company.  

It is safer to treat essential personnel whose schedules you control as employees.  The #federal# Labor Department and many states are cracking down on employers who have 1099 employees because it costs the state lost wage taxes, in addition to being generally less favorable for the workers.

You can obtain a publication from the IRS that should help.  It is Publication 15 #2012#, #Circular E#, Employer's Tax Guide.  Additionally, the U. S. Department of Labor has many publications that you can get from their website, plus helpful people at the local offices who can answer your specific questions.  If you can afford it, checking with an attorney is usually a good idea.

Best of luck with the change.  

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Margaret M. deMarteleire

Expertise

I can answer most questions about employment law, federal or state. I am an attorney, not an HR professional, so questions about HR careers, coursework, prospects, etc. are not within my scope.

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Attorney for 20 years, currently working exclusively with employment law - FLSA, FMLA, federal contracts, pay, etc.

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Temple University School of Liberal Arts, BA, Rhetoric & Communication, 1982 Temple University School of Law, JD, 1990 Certificate in HR, Cornell University ILR School, 2006

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