--- Warning --- Another Long Rant
Well here we go again… As indicated in an earlier post, I’m going to blog on a little bit of fraud in the entertainment industry… The paying of technicians on 1099’s rather than W-2’s… Before I go off on what makes this so wrong (not to mention illegal) let me just explain the difference between the two for anyone who may not be familiar with these little government forms.
The W-2/W-4 combination is used to report earnings for an employee to the government for tax purposes. That includes your income tax, unemployment, disability, and other contributions you are required to pay. Most of you out there get a W2 for what you do.
The 1099 form I am referring to in this case is the 1099-Misc. There are a large number of 1099’s that apply to everything from interest on money, to inheritances things, to the one I’m talking about. The 1099-Misc is used in this case to pay people as Independent Contractors. That basically means that you are acting as your own company, without going so far as to need to file under a Schedule-C heading. Confused yet?... Ok, think of it this way. If you gave some kid $50 a week to mow your lawn, you could file that as a 1099-Misc, as the kid is acting as a company at that point. The kid would then be responsible for making sure that income was listed on his tax return. (lets just ignore that the example was a kid, and assume that its an adult for the moment to make it easier)
Now, naturally the IRS has a set of rules that governs how payments are classified. If there was one page that explained it all, I’d simply link it… Alas, this is the IRS and there are several… Just hang in there with me, and we’ll get through this… It really does come down to some very simple rules, so I will go through those… If you want to read the tax code, be my guest.
The following is an excerpt from IRS Publication 15a, which covers the differences and classifications of employees and independent contractors. And I had to re-type this, so if there’s a typo, it very well may be mine… damn PDF is in two columns so I can’t cut and paste) There are other guides from the IRS, but this is the best one I’ve found.
To determine if an individual is an employee or an independent contractor under common law, the relationship of the worker and the business must be examined. All evidence of control and independence must be considered in any employee-independent contractor determination, all information that provides evidence of the degree of control and the degree of independence must be considered.
Ok, that seems logical if long winded. They then go on into the description of what that evidence needs to be concerned with.
Rather than typing out all of 15a (it is 58 pages), let me give you the English version of the next part.
They break out the evidence into three categories. Behavioral Control, Financial Control, and Type of Relationship.
Behavioral Control is concerned with determining if the employer has the right to dictate how the end result is to be achieved.
· When and where to do the work
· What tools and equipment to use
· What workers to hire or to assist with the work
· Where to purchase supplies and services
· What work is to be done by what individual
· What order or sequence to follow
· Will the employer provide training
Financial Control… Well that’s kinda self explanatory right?
· To what extent does the person have unreimbursed expenses
· The extent of the workers investment
· The extent to which the worker makes services available to the relevant market
· How the business pays the worker (aka wage, salary, dayrate, etc)
· The extent to which the worker can realize a profit or loss
Type of Relationship
· Written contracts describing the relationship the parties intend to create.
· Whether the business provides the worker with benefits (insurance, vacation, sick pay, etc)
· The permanency of the relationship
· The extent to which the services are a key aspect of the regular business of the company.
Ok… That’s what we get to deal with to make the determination.
Since I had no bloody idea this was going to get so long, I’m going to break here, and do part two later, where I will try to explain how the industry works. After that, then it will be obvious why these people are actually employees and not independent contractors…