Risk Mitigation

1099 Reclassification Risk: The Basics

If tax or labor authorities determine that your business uses independent contractors, 1099s, or SOW consultants who don’t comply with regulatory guidelines for working independently, they can reclassify them as W-2 employees, resulting in significant fines and back-tax burdens.

Think your business is immune? Think again. The IRS estimates $350 billion a year* in unpaid taxes, with a huge portion attributed to independent workers’ non-payments. That’s serious motivation to make sure contractors are classified correctly. To prove that they’re not messing around, the IRS has added a fleet of new agents to help close this gap. In fact, the U.S. administration proposed $50 million in independent contractor compliance enforcement for 2012, even while budgets were being slashed nearly everywhere else.

W-2s are your best bet

Not sure if your contractors are compliant? You’re definitely not alone. Compliance determination is complex and ambiguous, with even experienced auditors sometimes disagreeing on compliance status. But here’s one thing they do agree on – W-2 employment eliminates reclassification risk. After all, W-2s’ taxes are withheld automatically, so there’s no need to reclassify.

MBO Enterprise carefully assesses your contractors for compliance and offers a contractor-friendly W-2 engagement service for non-compliant ICs. And for those who are compliant, we offer a convenient sub-contractor engagement service that indemnifies you should an audit ever overturn our compliance determination. Either way, all your contractors will be operating in compliance. And your business will finally be safe from the invasive threat of 1099 reclassification.

The Penalties Can Be Overwhelming

While individual contractors are responsible for their taxes, the IRS finds it more effective to penalize their client organizations for engaging non-compliant 1099s. And when reclassification happens, look out: penalties include fines, back taxes, and interest that can reach 80% of your original contractor spend. Spread that over multiple years, and penalties can easily stretch into the millions of dollars. And that’s only the beginning. The IRS shares its audit data with most states, and states’ misclassification penalties can be as damaging – if not worse – than those of the IRS.

MBO Enterprise eliminates reclassification risk by offering safe W-2 employment for non-compliant contractors. MBO Enterprise also provides General Liability, Workers’ Compensation, and other required insurances, all of which further reduce risk. And our engagement services are uniquely attractive to contractors, which even helps reduce the number of disgruntled and the associated threat of co-employment lawsuits.

Advanced Compliance Assessment Technology

MBO Enterprise’s proprietary, online assessment tool gathers the information necessary to validate contractors’ status and warehouses their documentation for fast and thorough audit support. Our assessment technology is easy to use and is features careful human review of each assessment to ensure highest levels of compliance accuracy.



* Based on data from 2001, the most recent year for which a “tax gap” study has been completed.