A new Department of Labor regulation that changes the way employers classify employees versus independent contractors is scheduled to take effect March 11. U.S. Chamber of Commerce policy experts Marc Freedman, Vice President, Employment Policy, and Tom Sullivan, Vice President, Small Business Policy, offer some clarity on this change.
What is the difference between a W-2 employee vs. a 1099 contractor?
Marc Freedman: A W-2 employee is an employee of the company, which means the company is responsible for withholding income taxes and Social Security payments, as well as other tax requirements. If someone is a 1099 contractor, they are responsible for these tax requirements on their own.
There’s a new rule from the Department of Labor that deals with independent contractors. What does it say and what impact will it have?
Marc Freedman: The Department of Labor’s new regulation resets how someone is defined as an independent contractor or an employee under the Fair Labor Standards Act (FLSA), which covers minimum wage and overtime. The new regulation will force companies who hire independent contractors to review their agreements to make sure they can continue as independent contractors. The regulation will mean some workers will look more like employees, which will force these companies to decide whether to make someone an employee or discontinue the independent contractor relationship.
Many independent contractors call themselves 1099s. How does the new DOL rule affect these people?
Marc Freedman: The term “1099” comes from the tax form independent contractors receive from the IRS at the end of the year showing what they have earned. The IRS and DOL have different definitions for who is an independent contractor. In general, companies will treat someone as an independent contractor or an employee for both IRS and DOL purposes. The new DOL rule does not affect whether someone would be an independent contractor under the IRS’s definition.
What is your best advice to a small business owner who is trying to determine whether they should hire an independent contractor?
Tom Sullivan: I just met with a small business owner from Lansing, Michigan. Many of her employees worked for two generations of the business and her employees are what she cares about most. She has a handyman who is an employee of her company. That handyman wants to run his own business and does not want to be considered a W-2 employee anymore. This owner wants to fulfill the handyman’s wishes, but had to hire an attorney to ensure the process meets federal Department of Labor requirements, IRS requirements, and Michigan’s Unemployment Agency requirements so she does not get in trouble. My best advice to any small business owner is to be sure you consult with your attorney and accountant when making these decisions.
The Emporia Area Chamber of Commerce offers many resources to help you start, run, and grow your business–including our annual Leadership Emporia Academy, monthly Group Lunches, Ribbon Cuttings, Business After Hours events, Legislative Dialogues, and more. Stop by the Trusler Business Center at 719 Commercial St., call 620-342-1600, or visit our website at www.emporiakschamber.org to learn more.
# # #
“Let’s Talk Business” is a weekly column of the Emporia Area Chamber of Commerce and Visit Emporia. The mission of the Chamber is to be proactive in creating an environment for business and community success, guided by the vision that positive attitudes promote positive actions. Contact us at 620-342-1600 or chamber@emporiakschamber.org and visit our website at www.emporiakschamber.org.