Independent Contractor vs. Employee
Knowing how to properly classify your workers is important. If you misclassify an employee as a contractor, your company could be liable for employment taxes, back pay, fines and other penalties from both the federal government and one or more state agencies. Justworks always suggests consulting an attorney about the circumstances of your particular situation.
Keep in mind that, depending on applicable federal or state employment laws, different tests may apply to evaluate a worker's independent contractor status. Under most laws, one key difference between employees and independent contractors is the degree of control you have over the worker.
Generally speaking, a company that engages an independent contractor tells the worker what the scope of work is, but does not have control over how the contractor achieves the desired result.
However, there are many other factors that may be relevant to making a proper determination. Check out this page on the IRS website for more information about how the IRS analyzes the differences between employees and independent contractors. You can also find some helpful resources compiled by the federal Department of Labor that speaks on classifying workers under the Fair Labor Standards Act (FLSA).
Some state laws apply significantly more stringent "ABC tests" that make it more difficult for an employer to properly classify a worker as an independent contractor. For example, under California's "ABC test," a company must demonstrate that the worker meets all of the following conditions to properly classify them as an independent contractor:
- the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact; and
- the worker performs work that is outside the usual course of the hiring entity’s business; and
- the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
In addition to California, a growing number of states including Connecticut, Massachusetts, and New Jersey have one or more laws that apply some version of the ABC test.
Engaging a Former Contractor as an Employee
If a contractor’s job functions change, that worker, possibly may now be properly classified as an employee. You should consult an employment attorney about the circumstances of your particular situation, especially if you are concerned about how you classify workers in California or other states that apply the ABC test.
In order to hire a former contractor as an employee, you should terminate the contractor on the platform and then rehire the individual as an employee.
Terminating the contractor
You can find the contractor by logging into your Justworks account, and clicking on their name under Manage > Contractors. From the top of their profile, you’ll see the option to ‘Schedule termination’, you are then able to go through the workflow to terminate the contractor.
Rehiring as an employee
You are able to rehire a terminated contractor as an employee by logging into your Justworks account and clicking on their name under Manage > Contractors >Former Contractors.
On the top of their profile, you are able to select ‘Rehire’.
You’ll have the ability to select the user type, pay basis and pay rate that you’re changing for this individual. Keep in mind what you enter here may have an impact on their benefits eligibility, depending on your company’s offerings.
During the workflow, you’ll have to enter an exemption status for your employee. If you need to read up on exemption statuses and the Fair Labor Standards Act, you can visit the DOL website.
Next, you’ll choose an effective date of the switch.
Once you hit ‘Continue,’ you’ll be all set!
Depending on the effective date you selected, payments may be prorated for this employee. You can find their pay schedule under their ‘View Payments’ tab on their profile. They will not have to set up an additional account. Instead, they will be able to keep their same username and login, even with their user type changing.
Engaging a Former Employee as a Contractor
In some cases, a former employee may perform some work for you at a later date. If that work would qualify under applicable laws as that of an independent contractor, you may re-engage them as a contractor through Justworks. If you are unsure whether a former employee should be engaged as a contractor, consult an employment attorney about the circumstances of your particular situation.
If the individual you wish to engage as a contractor is not already terminated, you would need to first go through the workflow to terminate the individual as an employee. Once the individual has been terminated as an employee, you can then add them to your company as a contractor.
Adding an individual as a contractor
To add a contractor, select ‘Contractors’ under ‘Manage’ and select ‘Add.’
You will need to add the contractor’s information and an invite will be sent to the contractor to join the platform.
Once the contractor has set up their account and entered all the necessary information, you can begin issuing payments to that individual.
Contractors Paid at Least $600 in a Calendar Year Will Receive a 1099.
Justworks tracks how much your contractors are paid each calendar year through our system and will send your contractors a Form 1099-NEC and/or a Form 1099-MISC depending on the type of payment they are issued. In addition, we will electronically report these earnings to the IRS.
This service, along with processing unlimited payments to contractors, is included free of charge with any Justworks account.
You’ll also be able to add amounts that your company has paid outside of Justworks to a contractor’s profile, to ensure that the amount on their 1099 is correct. Depending on what the payment is for, contractors may receive either a 1099-NEC or 1099-MISC or both. You can find more information on the differences between the two forms here.
How to Add Payments for Contractors Paid Outside of Justworks
If you’ve paid contractors outside of Justworks, you can enter that value into their profile to make sure the amounts on their 1099 will be correct come tax filing time. You can do so from going to the Settings tab from the contractor’s profile:
From there, click the blue pencil from the Contractor Settings box. You’ll be able to enter the amount from the following screen.
That amount will be added to whatever amount you pay the contractor through Justworks on their 1099.
1099 Preview Report
Admins can view a preview of what information will be included on their contractors' and vendors' 1099s by navigating to the Report tab, and scrolling to the 1099 Preview Report.
From here, admins will be able to download a spreadsheet that includes the breakdown of what will be in each box of the 1099 through Justworks.
Please note: The reporting page will give you an overview of all contractors and vendors you’ve paid this year, including contractors and vendors that will not be receiving a Form 1099 from Justworks (if any). The downloadable 1099 Preview Report will display only the contractors and vendors that Justworks will be filing for this year.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, legal or tax advice. If you have any legal or tax questions regarding this content or related issues, then you should consult with your professional legal or tax advisor.