The Contractor’s Survival Guide to the New 1099 Rules

If your staff have been dancing in the gray zone between 1099 independent contractors and W-2 employees… the party is over.

As if finding great talent wasn’t a big enough challenge on its own, once you do manage to assemble your star team, there’s all the other stuff you’ve gotta take care of.

Withholding taxes, benefits, onboarding, tools, overtime… you know… OVERHEAD.

Bringing on new employees, no matter how fantastic they are, comes with costs, often upwards of an extra 40% above their base salary.

One of the ways American trades business owners have typically circumvented these costs was by hiring independent contractors. But thanks to some recent renos the IRS has made to the rules, you now need to be very careful how you classify your workers.

For those industries that have relied heavily on the previous murkiness around 1099 laws (ahem, roofing sales teams), it’s time to quit tap dancing and get your people sorted.

One of the most prominent voices on the new 1099 rules is The Roof Strategist Adam Bensman, who spoke to us at Contractor Evolution to briefly explain What’s up with 1099s?

Read on to get a breakdown on the changes and what they mean for your business.

What is the difference between a 1099 and a W-2?

Let’s start with the basics, the fundamental definitions. After all, while “1099” and “W-2” get thrown around a lot in employment discussions, we’re not referring to space robots (yet, anyway). 🤖

There are real people behind these terms. So who are they?

1099

Individuals that fall into this category will be actual (this is key!) independent contractors or self-employed tradespeople. Normally, you’d be hiring them for specific projects.

W-2

These folks are tried and true employees. They can be full-time or part-time, but either way they’re on your payroll, and you need to cough up for their state and federal taxes, medicare, unemployment… the whole shebang.

What is the new rule for 1099s?

On March 11, 2024, the IRS dropped an update to the Fair Labor Standards Act, which is the law that covers the use of 1099 workers.

The new rule clarifies the difference between a 1099 independent contractor and an W-2 employee, and closes virtually every loophole between the two.

How do I know if I have a 1099 or a W-2?

To help answer this question, the United States Department of Labor has put together what they call the Economic Reality Test.

While it sounds like it could be used to help you decipher whether or not you’re living in the real world – useful given the current state of the political landscape, housing crisis, wars, and whatnot – it’s actually designed to help you easily (-ish) determine whether a member of your staff should be classified as a 1099 or a W-2.

It boils down to six factors:

• Opportunity for profit or loss depending on managerial skill
• Investments by the worker and the employer
• Permanence of the work relationship
• Nature and degree of control
• Whether the work performed is integral to the employer’s business
• Skill and initiative

🤔 To help interpret these parameters, let’s look at a couple examples.

My painting company hires individual painters to, like, paint things.

If those painters go from job to job for you, because you’re running a painting company their work would be considered integral to your business and they should be classified as W-2 employees.

My salesperson sets their own hours and pays for their own marketing, though they use my CRM, wear my garb and my company is their only client.

In the eyes of the IRS, the salesperson would be a W-2 employee because any leads they generate only benefit your company. Also, since they’re using your CRM system, you have a degree of control over them, and they would be considered managed by you.

⚠️ Be careful with crews! ⚠️

Under these new rules, crews won’t necessarily fall under the W-2 classification, and could still be considered legitimate subcontractors, depending on:

• Their ownership structure
• How much control you have over their work terms
• Whether they maintain other clients

Does it matter if I get it wrong?

Unless you’re keen to tango with the IRS (not recommended), then the answer to that question is a resounding YES. It sure as hell matters.

There are a myriad of situations that can trigger the IRS to investigate your company:

• Lawsuitss
• Injury claimss
• Unemployment applicationss
• Insurance claimss
• Failing to pay minimum wage or overtime

And here’s the thing, if they deem you to have misclassified an employee, the consequences are PAINFUL and include back taxes on both the state and federal level, financial penalties, and fines. Kiss your healthy profit margins guh-bye. 💸

You can try and fight it, but take it from this very knowledgeable lawyer that you will. not. win.

Though you will waste a bunch more money in legal fees. 💸 💸

Alright. I need to switch some of my staff. Now what?

The best place to start is with guidance from your accountant, who can make sure all your “t’s” are crossed and your “i’s” are dotted.

You can also hit up the IRS website to get an overview of the various 1099 and W-2 forms.

If you’re curious to dig deeper into the nuances of these labor laws, you can get a quick summary in this Contractor Evolution clip.

And of course, Breakthrough Academy is always here to help!

If you’re a motivated contracting business owner looking to scale your company and extract yourself from the day-to-day, get in touch with us today. .