The Danger of Using 1099 Independent Contractors to Avoid Obamacare

Employers are scrambling to find ways to avoid the dreaded "employer mandate" of the healthcare reform law, but those who think Independent Contractors are the answer should think again.

The employer mandate portion of the Patient Protection and Affordable Care Act (PPACA) requires employers with 50 or more full-time employees to provide healthcare coverage to their employees. Even though the mandate doesn't kick in until 2014, employers are preparing now because how their firm is structured in 2013 will determine if they must offer coverage next year. 

Therefore, employers are already cutting employee hours, freezing hiring, and even laying off employees to reduce their full-time headcount. Others are planning to utilize contractors, but they need to be careful how they go about it.  The temptation is to simply reclassify workers Independent Contractors and pay them on a 1099 rather than a W-2.  Independent Contractors (IC) are not considered employees and therefore would not count toward employers' number of full-time employees.

But calling a worker an IC doesn't make it so. The IRS has strict guidelines regarding who can be an IC. Some of the factors the IRS considers are the level of control the company has over the worker, the duration of the relationship, and the payment structure. 

The IRS has been cracking down on the misclassification of workers as ICs for the past few years, but it looks like that crackdown will only get more intense in light of the PPACA. According to a recent Wall Street Journal article, the IRS has "vowed to be more vigilant" against companies that misclassify workers, and attorneys quoted in the article expect audits to increase. The article states that employers could have to pay back taxes and penalties associated with the PPACA if they are found to have misclassified workers.

One of the biggest red flags for the IRS when it comes to worker classification is when a worker who was a W-2 employee is suddenly paid on 1099. Therefore, employers who convert current W-2 employees to ICs will especially be at risk for IRS audits.

A better way to achieve the same result is for companies to utilize contractors who are the legal W-2 employees of a staffing firm or back-office.  The workers then count towards the back-office's headcount, not the company's. Therefore, the company doesn't have to worry about PPACA compliance or IRS audits.

This represents a huge opportunity for recruiters.  By providing contractors to your clients, you can pick up new potential clients and get more business from your existing clients. In addition to helping companies avoid the employer mandate, you can help those that already have more than 50 employees reduce the number of direct hires they have to provide coverage to because they can staff entire departments and projects with contractors.

If you do offer W-2 contractors, be sure that you align yourself with a contract staffing back-office that is familiar with Obamacare and is PPACA compliant.

This article is for informational purposes only and should not be construed as legal advice.

Debbie Fledderjohann is the President of Top Echelon Contracting, Inc.

Views: 654

Comment by sheila Greco on January 29, 2013 at 8:43am

Right on! Thanks Debbie. 


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