For any large organization, managing the risks of using independent contractors is a tremendous burden. The whole question of 1099 vs W2 worker classification is perplexing, and the coemployment aspect of 1099 risk plus the fear of contractor lawsuits makes things even murkier.
But for federal contractors — those organizations that do business with our government — the bar is set much higher, and the consequences for getting things wrong are far more worrisome.
So what’s so special about 1099 risk for federal contractors?
Two things: Enforcement of Tax Compliance, and the new E-Verify rules.
Every year, the federal government pays more than half a trillion dollars to contractors from a wide variety of goods and services. Yet, the GAO has discovered that tens of thousands of contractor companies owe the government over $5 billion in unpaid taxes . . . and are still permitted to bid for and win lucrative federal contracts.
In January, President Obama signed an executive memorandum calling out federal contractors that fail to pay their taxes. The action would allow the IRS to share tax information with contracting officers and block federal contractors from winning future contracts if they are seriously tax delinquent.
Those of you who read our Contract Talent Blog regularly may already understand that a company that misclassifies workers as independent contractors — whether knowingly or unknowingly — can end up seriously tax delinquent. Getting worker classification right, and applying the correct independent contractor test to ensure 1099 compliance, is critical.
It may be inconvenient for a regular business to have to jump through the compliance hoops to properly handle contract labor and contractor compliance, but for a federal contractor heavily reliant on doing business with the government, this is no longer an option.
Next steps: If you have reason to believe your business is mis-classifying employees as independent contractors, it is time to do a full contractor assessment. Seek the guidance of a third party Independent Contractor Engagement Specialist if you do not have the compliance expertise in house.
The second unique aspect that federal contractors face with regard to independent contractor use is E-Verify.
Federal contractors out of compliance with E-Verify can face debarrment from federal contracting, bottom line. And yet, many (if not most) major federal contractors are using independent contractors that would likely not pass a reclassification audit.
These may seem like separate issues, but they aren’t. If you are not correctly classifying your workers, and have misclassified employees sitting in the 1099 contractor bucket, then guess what . . . . you have not used E-Verify on those workers.
Next steps: Be sure that the hiring of independent contractors and sub-contractors is highlighted in your business as an area of tremendous risk. Centralizing a compliance process for independent contractor classification should help. Be certain that you implement new risk management processes going forward, and then go back and take care of incumbent 1099s working in your organization.
The Take Away
Independent contractor compliance is, for many businesses, the weakest link. For a federal contractor, the stakes are even higher. Failure to properly classify workers (1099 vs W-2) may be the end of your ability to do business with Uncle Sam in the short term or the long term. Whether the determination comes from the IRs and your tax delinquency, or if it comes from DHS and your failure to use E-Verify on all required employees, you are now being held to a higher standard of compliance.
Unfortunately, 1099 risk isn’t going away any time soon. In fact, at every level — legislation, enforcement, lawsuits — the climate is getting more rigorous.
The best practice is to perform your own internal audit now — leveraging the expertise you need from specialists in contract talent risk mitigation — before a regulatory agency steps in and does it for you.
Or as Nat King Cole sang so memorably, “Straighten Up and Fly Right!”
Bonus: Click here for your complimentary PDF download of, “E-Verify Requirements for Contractors.” This paper, jointly produced by MBO Partners and Michael Best & Friedrich, LLP, highlights the special concerns federal contractors should attend with regard to using Independent Contractors and the current E-Verify rules. No registration required for full text access.
Is your business concerned about the new Obama memo on tax delinquency? Or are you confused by the E-Verify requirements?