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Dangers of using 1099 independent contractors to avoid Obamacare

This column would not live up to its name, Employment Strategy Corner, if we did not deal with the most important single addition to an employer’s responsibilities in many years, the Patient Protection and Affordable Care Act (PPACA), known affectionately as Obamacare. We will not deal with the whole Act today, only the portion of it that must be established in 2013, the portion that can be misleading, and most costly. However, I would encourage you to read the Act in its entirety at your earliest opportunity.


Here is one of the most important single messages you are likely to read this year when it comes to your employees. It covers a topic that can be misleading and most costly under the new Obamacare law. I am pleased to be able to provide you with the answer to this confusion. It centers around the proper use of independent contractors, but read on to see how.

Yes, employers are now scrambling to find ways to avoid the employer mandate of this healthcare reform law. The first thing they think of are independent contractors. But those who think old fashioned independent contractors are the answer should think again. Here’s why.

The employer mandate portion of the 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 firms are 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 here is where they need to be careful how they go about it. The temptation is to simply reclassify workers as independent contractors and pay them on a Form 1099 rather than a Form W-2. Independent contractors are not considered employees and therefore would not count toward employers’ number of full-time employees.

But calling a worker an independent contractor doesn’t make it so. The Internal Revenue Service (IRS) has strict guidelines regarding who can be an independent contractor. 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 independent contractors 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 a 1099. Therefore, employers who convert current W-2 employees to independent contractors will stand out, and will especially be at risk for IRS audits.

What should an employer do?

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, like my firm, Kemper Associates. Therefore, you do not have to worry about PPACA compliance or IRS audits. Using a contract staffing back-office will put the contractors on its payroll, and it will handle all of the employment responsibilities, payrolls and deductions. This will keep you in PPACA compliance.

In addition to helping your company avoid the employer mandate, a contract staffing company can also help a company even if it already has more than 50 employees. A contract staffing company can reduce the number of new direct hires that a company would have to provide coverage to, because they can staff entire departments and projects with contract staffing firm workers. You’d be surprised how many companies are making this change right now.

Good luck in making these important employment decisions. This article will help. If you have any questions or comments, my contact information is below.

Philip Kemper is founder and president of Kemper Associates, a 36-year-old Chicago-based national executive search firm, specializing in permanent and contract staffing for tradeshows and exhibits, staging and equipment rental, business meetings and events production, and training and incentives. His complete bio is on LinkedIn at www.linkedin.com/pub/philip-kemper/2/795/308/. For more information, visit the Kemper Associates’ web site at www.Kemperassociates.net, or contact Kemper with questions or comments and employment needs at Kemperassoc@hotmail.com, or his private phone line at (312) 944-6551.

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