Your Solo 401(k) Plan — 1099 Contractors? (Part 3)

This is Part 3 of the series on determining whether a worker is an employee or an independent contractor.  In the first post, there were determining questions for an employer which, if they answered YES to ALL of the questions, would appear to indicate that the worker is an independent contractor.  In contrast, in the second post, there were 8 questions which, if the employer answered YES to, would appear to indicate that the worker was an employee.

In this last blog, another 8 questions are identified as indicators as to whether a worker is an employee or an independent contractor.  Similar to Part 2, if the business owner answers YES to any of these questions, it would seem to indicate that the worker is an employee.  So, on to the last 8 questions in determining the employee/independent contractor status of the worker.

1)  Is Work Done On-Site? — Must the worker work on the site of your business?  If you, as the business owner, require the worker to work on site of your business, that might be a tell-tale sign that the worker should be considered an employee.  By the way, even IF the business owner answers NO to this question, it does not necessarily mean that the individual is a 1099, independent contractor.

2)  Control Over Work Performed? — As the business owner, do you determine how the work is done, the manner in which it is done, and the order of how the work is done?  Remember, an independent contractor is truly independent and determines how, the manner and order of how the work is done.  If you dictate the schedule of these activities, it would seem to indicate that you control the individual and, therefore, the worker would be considered an employee.

3) Requirement to Report? — As the business owner, do you require the worker to give you accounting reports of work performed, etc?  Doing so may show a lack of independence that the worker has and needs to be considered truly independent.

4)  Compensation to Worker? — Is the worker paid on an hourly, weekly, bi-weekly or monthly basis?  Typically, an independent contractor is paid by the job or on some sort of commission basis.  Keep in mind, this is a generalized statement.  For example, you may retain the services of a website site professional who, based on that industry, may insist on being paid hourly.  Moral of the story, consult with your tax or legal professional.

5)  Expenses of Worker? Do you pay expenses for the worker or individuals who may also work with the individual?  Remember, if you are paying for any of the worker’s business or business travel expenses, this might be a clear sign that the worker is controlled by you and, therefore, may be considered an employee.

6)  Tools and Materials? — Do you provide the worker with equipment, tools, materials or any items to assist them with their work?  If so, the worker would most likely be considered an employee as an independent contractor usually is responsible for providing their working tools.

7)  Can You Fire the Worker?  Do you have the prerogative to fire the worker?  If you get upset, can you just unilaterally fire the individual?  If so, the individual would be considered an employee.  An independent cannot be fired without potentially subjecting you to the risk of breach of contract lawsuit.

8) Can the Worker Quit?  — Can the worker quit at any time….like a regular employee?  If so, they are an employee.  An independent contractor does have a legal obligation to complete the job they were retained for.  If they fail to keep their obligation, they can incur legal consequences for not finishing the contractual obligation.

As you can see, the determination of whether a worker is an employee or an independent contractor is not as simple as the business owner simply saying “the person is an independent contractor.”  All these questions are intended to make clear one’s status….and, even then one may scratch their head in confusion.

Bottom line:  if you face this hurdle with your business, give serious consideration to whether the worker is an independent contractor or an employee.  Not only might it have an impact on your Solo-K plan, it may also have a drastic affect on your business.

As always, the information provided is intended to be educational in nature.  It is not intended, nor should it be interpreted as, any form of tax, legal, financial or investment advice.  You must always consult with your respective professional in all such matters.