Are Worker Status Laws Affecting the Contractor Market

I am curious and would love to hear from others with any experience regarding Worker Status laws. First, I have recently come across a couple of posts regarding a “crack down” on worker status violations. Probably in response to increased utilization of contracted workers as a result of recent legislated burdens in maintaining employees. Worker status is a determination of whether a worker must be classified as an employee or an independent contractor. The determination dictates whether the employer or the contractor bears the burden of employment taxes and worker protection under the law. Determination has always been a little gray and each tax and legal entity involved has their own methods. Further any difference in determination between the worker, workee* and taxing or legal entity is open for interpretation with the taxing or legal entity getting the final call.

Second, I am seeing a proliferation of so called W2 contract positions. My understanding is that these positions are offered as opposed to 1099 positions. Basically W2 means an employee, either employed by the workee or with an agency contracted to the workee, and 1099 means the position is a traditional independent contractor position (see more in the next paragraph), not many of these exist in my field anymore. This observation is consistent with my first observation that 1099 positions are being scrutinized and few 1099 positions would pass scrutiny. Basically the W2 positions are what I would call “temps” and these do not pay well. Surprisingly I have found that many recruiters don’t really understand the difference between a W2 and a 1099 position as they apply to the law and tax implications, especially the difference in cost and value to the worker and workee. I just recently tried to explain why the rate for a 1099 worker needs to be significantly higher than that for an equivalent W2 and why the cost to the workee is the same. He said he understood but still claimed he was not experiencing any difference in what was being offered.

Third, I have also been asked if I offer a corp-to-corp arrangement. Which, I discovered some time ago, is the term for exactly what I do offer. Provident Systems is an S-Corp which employs and pays me with a W2 and bears all of the employer burden of me, the employee of Provident Systems. A customer of Provident Systems gets a W9 Taxpayer ID as it would from any other vendor as required by IRS guidelines. And, clients do not even have to provide a 1099 to Provident Systems since 1099’s are not required to be provided to corporations, including S-corporations. So, a 1099 position, as opposed to a corp-to-corp, would be one in which the worker’s W9 indicted the worker as a “sole proprietor” and thus claiming his income on a schedule C of a personal 1040. In contrast, a corp-to-corp arrangement is not much different than buying goods and services as a company would from any other vendor.  Again, a distinction I have had trouble describing to recruiters looking for providers of short-term skilled services for their clients.  Part of their problem is the recruiting company they work for is looking to be the agency providing the W2 and then re-selling the worker’s time to the client. Trying to convert these opportunities to a corp-to-corp makes their compensation calculation difficult.

Finally, it is my understanding that since Provident Systems is an S-corporation which files a W2 for its employee and reports its income on a corporate tax return, there is no gray area on worker status with its clients. Much like there would be no gray area on a worker provided to a workee via a third party agency, such as the recruiting agencies. It just happens that in this case the “agency” providing the worker is also owned by the worker.

So, I would appreciate any comments on two areas. First, from HR professionals: are you seeing a push to only look for so called W2 contracts, aka temporary workers, through an agency? And second, from HR or legal professionals: is my information above correct? Is an employee of an S-corp (aka the owner) completely or mostly exempt from worker determination tests with respect to the S-corp’s clients?

* workee is to read as employer of contract client depending on worker status. Please excuse me for this liberty in terminology.

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