Also not an accountant or lawyer, but I think that if you're paying someone by the hour, and directing them as to how they should do they job, they need to be classified as an employee, not a contractor.
This means a W2 instead of a 1099, plus you need to pay them on a fixed schedule, pay social security and medicare taxes (and likely other taxes depending on jurisdiction) on their wages, deduct income taxes, do an I-9 verification at the beginning of employment, change your own liability insurance, etc.
There is software as a service companies that help out with setting this up correctly, but I do see many ways you could do this incorrectly, and land yourself in trouble.
NY posts all of the requirements for hiring a new employee on a single page. It's a simple process, and even simpler if you use a payroll service provider.
> Also not an accountant or lawyer, but I think that if you're paying someone by the hour, and directing them as to how they should do they job, they need to be classified as an employee, not a contractor.
> This means a W2 instead of a 1099 [...]
I'm a freelance developer in NY and this isn't the case. When someone requests me to do work for them they tell me what they want done, we scope out the project and then I either bill them by the hour or by the project depending on what's going on. Sometimes I work 50 hours a week on that project, sometimes 5.
But in all cases, they send me a 1099 at the end of the year. I might be considered some type of contractor in their software since most of the companies I work for auto-bill me through some software but in no case have I ever been declared as a W2 employee. Everything you wrote is true if they were a W2 employee, but that means being officially hired and defined as a full time employee.
Also I've paid out a lot of people for contract work as a freelancer and my accountant said it's no problem. I just give the numbers and he provides me the 1099 to send out. It's been working like this without issues for years.
This is partly why freelance or contract workers need to and can get away with charging more per hour. They get no perks of being an employee. Health care is super expensive and we essentially pay double the social security taxes since we're both our own employer and employee. There's also no free lunches or other employee status perks like matching retirement funds, etc..
But on the flip side, getting hired as a freelancer is a huge win for business owners because now they don't mind paying higher rates for a freelancer since they are off the hook to provide all of those W2 benefits and also avoid paying a consistent salary even if there's not much work to do (typical scenario where you're clocking 8 hours a day but only 2 of those hours are productive things). A freelancer might get 5 productive hours in for that day, charge for 5 hours and after a week they clocked 25 hours but a salary worker would have clocked 40 and was productive for less than half (not due to laziness but there's just not enough "real" work to do).
After factoring in everything, if the freelancer is technically 4x or even 5x the salary worker's hourly rate the business still comes out ahead.
It will probably come as a surprise to you (it did me several years ago), that it’s not simply up to you and the company hiring you if you are considered a freelancer.
This is not a matter of billable vs guaranteed hours. It’s a classification based on employee control over the person in question.
In fact, if you were micro directing the people you paid 1099, you may have had what the state of NY would consider an employee. Yes you’ll probably never get found out, but that doesn’t negate the fact.
> It will probably come as a surprise to you (it did me several years ago), that it’s not simply up to you and the company hiring you if you are considered a freelancer.
Where do you draw the line?
Let's say you hire someone for 3 hours to help you out for a specific task. A "I would like X done with Y" type of scenario. Are they now considered an employee?
What if you asked someone to do a code review for 5 hours where you precisely told them what to do, but it's on them to determine the state of the code? Also an employee? Does your answer change if you asked them to do this 1 hour a week for a year?
Here's another example. A company hired me to do X. This ended up being a ~100 hour project. They gave me a checklist of deliverables and a pretty decent break down on how to implement everything. They let me choose the tech (but had suggestions on what to use) and how the application functioned was defined by them. Am I an employee and if so, what if I worked 20 hours a week until it was done vs 50 hours a week -- does that change anything?
Scenarios like the above are really common in the freelance world. You get a super wide range of work thrown at you (as you know).
I've talked with a number of accountants over the years and always told them everything I've been up to. I was never once recommended to classify myself as a W2 employee, or be on the hook for hiring a W2 employee for short term contract work that I provided someone. It's always been 1099s in and 1099s out.
Usually in your situation you will have your own computer, your own workspace (except for meetings with the client), and deliver things based on a predefined scope (or predefined set of expectations). That's good enough to make you a freelancer.
On the other hand, if the company told you to use their laptop, show up in their office, work using their methods—effectively manage how you work... that becomes W2 territory.
Taking a step back, you're respecting the spirit of things. The company has a need, you have a solution, y'all have a transaction. On the other hand, if they were to integrate you as part of a team, within their processes, that's a W2.
Of course in practice there's a third way that is common: large company A makes use of an intermediary contracting company B that they can pay as needed[0], and the contractors are W2 salaried of B, while A maintains all their flexibility.
[0] Generally for all the crappy work that they don't want to do themselves. If you find yourself working for B, make it a learning experience and a personal goal to move beyond it.
Using company equipment gets complicated pretty fast. Some 'contractors' have to use company equipment because the company won't allow proprietary or regulated data on machines they don't own. Is that enough to make someone an employee?
Yeah and it gets even more grey because what if you're using your own computer but you have to connect to hardware that the company owns such as a server, or even servers on the cloud that the company is renting and paying for.
Technically you're using something that belongs to them. Then there's the case of connecting through their VPN too.
Then it's like, why would using a company laptop to SSH into a company owned server be any different than using your own laptop to connect to a company SSH server.
And of course, what if you did great work for that company as a contract worker and they decided to give you a laptop as a bonus / gift. Or more realistically the thing you're developing requires a lot more hardware than your current machine so as part of the contract you signed, they will provide you an extra $1,500 up front to purchase a computer upgrade. Technically you bought the computer so it's not the company's. The greyness never ends haha.
>> it’s not simply up to you and the company hiring you if you are considered a freelancer.
> Where do you draw the line?
From the IRS[1]:
> The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work, not what will be done and how it will be done. Small businesses should consider all evidence of the degree of control and independence in the employer/worker relationship. Whether a worker is an independent contractor or employee depends on the facts in each situation.
...
> Written contracts which describe the relationship the parties intend to create. Although a contract stating the worker is an employee or an independent contractor is not sufficient to determine the worker’s status.
___
> The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work, not what will be done and how it will be done
Using this IRS logic then I wonder if most employees are really contractors.
If you're hired as an employee to work on project X, a manager would likely not even know how it will be done. They aren't going to write out the programming code logic for you (that's your job as the employee). They might give you business rules such as "it needs to do XYZ", but that's much different than "how it will be done".
That's the ting, there is no exact science here. It's an interpretation by the relevant state agency (like most taxes really).
For example, CA has been cracking down hard lately, dunno about NYS. Obviously enforcement is selective - better for the state to go after someone big like Lyft/Uber rather than you. Does not mean that you're in the right just because you didn't get your election scrutinized.
And FWIW - your accountants are right in that it's beneficial and probably totally fine to 1099. But ask them to guarantee that the state won't go after you for it and watch them squirm :D
the federal govt as well (the irs has a 20 point checklist to help make the determination)
every contract i've ever gotten in the last 10 years has required that i indemnify the company against being classified as a worker, and then given instructions that violate that checklist, and been upset when i pushed back
It's not really that complicated. If it's a short term engagement (3 hours literally once), then 1099. If you need them for 3 hours every week, then consider hiring them as a part time employee ... it's a long term relationship at that point. If you need 3 hours every week and engage a temp agency, then chances are you'll get a different person (even if they send the same person a few times in a row). If you engage a "temp agency" that's literally just a front for one person ... that's an employee and should be treated as such.
The difference is that the company that contracted you isn't managing your day-to-day work.
Company hires you and says "we need a website that does X" and leaves you to do it. You might be a contractor/free-lancer.
Company hires you and says "we need a website that does X, you need to work in the office and/or use our hardware, and we want it written in React, and you'll be working closely with JimBob the Manager." You are probably not a contractor/freelancer.
Yes, there's some grey area in there. It's a combination of the three factors in the ABC test that determines employee vs contractor.
From my experience, I've never seen a software contractor that could avoid being considered an employee if the eyes of the state government fell upon them closely.
I've never seen a software contractor that could avoid being considered an employee...
There are lots of them. Consider a company that doesn't produce software at all hiring you to build an app for them. or a company that has no expertise in your area, etc.
If you are embedded in a team and could swap roles with any of them, you probably aren't a really a contractor though.
> and directing them as to how they should do they job
This is, to me, a very puzzling take. If you hire a contractor, you don't direct how they do the job, only what the job output is like. Hourly contractors are certainly a thing.
I'm still confused how you can avoid tell someone how to do their job. A SW contractor can't be told which language to use or be connected to company source control or use existing company software libraries? A carpenter can't be directed in some fashion beyond: 'YOU, GO BUILD HOUSE FRAME'.
I did software contracting for a while. It’s certainly appropriate to define parameters like “use language x, code these features, by this deadline and keep a synchronized copy of the code in this repo.”
You can’t set hours and direct particular tasks day to day.
Having personally been through the employee vs contractor maelstrom when, for some unknown reason, the state government got a bug up it's ass, I'd have to say that the state requirements become quite arbitrary.
What you might think is appropriate is sort of besides the point.
I too have been through the maelstrom. What I think is appropriate for me as it all boils down to interpreting the IRS regs and hiring a good lawyer who successfully avoids and navigates lawsuits for me. Just because I navigated it successfully doesn’t mean I’m right or my interpretation is appropriate for all.
But I think it’s pretty useful and certainly disproves that it’s not possible to hire software contractors.
This gets into a big grey area and I’m not sure there’s an absolute rule. If I were writing the contract I would say “must pair program with employees” and let the contractor figure iut how to meet the req.
You can tell someone to "do this work". You can only tell an employee to "do this work, at this desk, using this computer, for 8 hours between 8 AM and 6 PM every weekday".
You can tell someone to "get it done by the first of the month or suffer a penalty". You can only tell an employee to "get 5% of it done every workday and send me your status metrics by 10AM every morning or you're fired".
You can tell the carpenter what the work is that must be done, and provide detailed specifications, but if there are multiple ways to get that work done, you can only mandate those details for an employee. To some extent, building codes establish a minimum standard that everyone should be satisfied with, and you could tell an employee to do the minimum amount of work required by the building codes to get the job done, but you can't stop a contractor from carving Mayan-inspired engravings into every stud if they feel like that's what the job requires, or from using glue and joinery where most people would just put framing nails. As long as the work meets the specs, the contractor can get there by any route they please, no matter how much or how little actual effort is required.
Uber can tell its driver to "to collect this fare, get this passenger to this location". When they start saying what kind of vehicle they have to use to do that, they are starting to move into employee territory. Clearly, a passenger can be moved from A to B by a restored and retrofitted tie-dye-painted 1970 VW minibus as effectively as a nearly-new factory-stock black 2018 Toyota Corolla, so when Uber is making requirements that speak more to their company's brand identity than to the reasonable requirements of the job, those are employee-like requirements.
It isn't always clear whether a requirement is directed more towards the means or the ends, because specifying an end result precisely enough may dictate that the only practical means to that end be used. So California has decided to resolve this exploitable ambiguity in favor of assuming certain types of worker are employees unless a minimum degree of autonomy can be demonstrated.
>To determine whether an individual is an employee or an independent contractor under the common-law, the relationship of the worker and the business must be examined. In any employee-independent contractor determination, all information that provides evidence of the degree of control and the degree of independence must be considered.
>Facts that provide evidence of the degree of control and independence fall into three categories: behavioral control, financial control, and the type of relationship of the parties. These facts are discussed next.
>Behavioral control.
>Facts that show whether the business has a right to direct and control how the worker does the task for which the worker is hired include the type and degree of:
>Instructions that the business gives to the worker.
>An employee is generally subject to the business' instructions about when, where, and how to work. All of the following are examples of types of instructions about how to do work.
> - When and where to do the work.
> - What tools or equipment to use.
> - What workers to hire or to assist with the work.
> - Where to purchase supplies and services.
> - What work must be performed by a specified individual.
> - What order or sequence to follow.
>The amount of instruction needed varies among different jobs. Even if no instructions are given, sufficient behavioral control may exist if the employer has the right to control how the work results are achieved. A business may lack the knowledge to instruct some highly specialized professionals; in other cases, the task may require little or no instruction. The key consideration is whether the business has retained the right to control the details of a worker's performance or instead has given up that right.
>Training that the business gives to the worker.
>An employee may be trained to perform services in a particular manner. Independent contractors ordinarily use their own methods.
>Financial control.
>Facts that show whether the business has a right to control the business aspects of the worker's job include:
>The extent to which the worker has unreimbursed business expenses.
>Independent contractors are more likely to have unreimbursed expenses than are employees. Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important. However, employees may also incur unreimbursed expenses in connection with the services that they perform for their employer.
>The extent of the worker's investment.
>An independent contractor often has a significant investment in the facilities or tools he or she uses in performing services for someone else. However, a significant investment isn't necessary for independent contractor status.
>The extent to which the worker makes his or her services available to the relevant market.
>An independent contractor is generally free to seek out business opportunities. Independent contractors often advertise, maintain a visible business location, and are available to work in the relevant market.
>How the business pays the worker.
>An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time. This usually indicates that a worker is an employee, even when the wage or salary is supplemented by a commission. An independent contractor is often paid a flat fee or on a time and materials basis for the job. However, it is common in some professions, such as law, to pay independent contractors hourly.
>The extent to which the worker can realize a profit or loss.
>An independent contractor can make a profit or loss.
>Type of relationship.
>Facts that show the parties' type of relationship include:
> - Written contracts describing the relationship the parties intended to create.
> - Whether or not the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay.
> - The permanency of the relationship. If you engage a worker with the expectation that the relationship will continue indefinitely, rather than for a specific project or period, this is generally considered evidence that your intent was to create an employer-employee relationship.
> - The extent to which services performed by the worker are a key aspect of the regular business of the company. If a worker provides services that are a key aspect of your regular business activity, it is more likely that you’ll have the right to direct and control his or her activities. For example, if a law firm hires an attorney, it is likely that it will present the attorney's work as its own and would have the right to control or direct that work. This would indicate an employer-employee relationship.
>IRS help.
>If you want the IRS to determine whether or not a worker is an employee, file Form SS-8 with the IRS.
But it's too bad that so many of those points are ambiguous due to lack of information.
For example, the "Computer Industry" example (CTRL + F for it). It's pretty clear cut that a huge amount of software freelance work falls under this example.
But then this sentence ruins everything: "Steve works at home and isn't expected or allowed to attend meetings of the software development group".
What if you have to goto 1 or more meetings to get a clarification on the specifications because part of what you're developing is related to 3 other people who are employees of that company.
It seems ridiculous to me that if you sit in on a 30 minute remote meeting, suddenly you're a W2 employee instead of a contract worker. Likewise it's ridiculous if you happen to go on site once or twice for whatever reasons. The examples are also left up in the air. If a single condition fails, is it an automatic W2 employee, or are you still able to be a 1099 employee and it just so happens the example didn't go into enough detail.
Then it's like, well, if you try to follow the rules but the rules aren't clear then how are you supposed to follow them. Surely you can't get in trouble (read: pay fines) due to the rules being incomplete?
This means a W2 instead of a 1099, plus you need to pay them on a fixed schedule, pay social security and medicare taxes (and likely other taxes depending on jurisdiction) on their wages, deduct income taxes, do an I-9 verification at the beginning of employment, change your own liability insurance, etc.
There is software as a service companies that help out with setting this up correctly, but I do see many ways you could do this incorrectly, and land yourself in trouble.