Hiring freelancers has become more and more popular with just about every time and size of the company. An incredible 59 million Americans performed freelance work this year, representing 36% of the U.S. workforce, an increase of 2 million freelancers since 2019. More managers are realizing the benefits that freelancers can bring to a company by providing flexibility. Now you can utilize an expert for a project exactly when and where you need them.
With a new flexible workforce consisting of some freelance and some full-time, businesses are forced to face new challenges around management and payments. Full-time employees are easy, they usually have set schedules and pay dates with taxes already accounted for in their paycheck. Freelancers on the other hand are much more complex. When you hire a freelancer, the very first hurdle you will face is to make sure they are correctly classified.
Misclassifying a worker can lead to significant penalties from the IRS that absolutely no one wants to deal with come tax time. While rules may have been more lenient in the past, recent legislation – especially in California – has led to more strictly enforced classification laws. Now is not the time to be fuzzy on the rules and making sure your business knows how to correctly classify a W2 employee vs a 1099 contractor is the first important step.
The Rules of a 1099 Classification
So, what ARE the rules? According to the IRS, there are three important categories to determine whether that worker you just hired is W2 or 1099.
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
- Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
- Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
Even knowing these rules, things can still be complicated when it comes to classification. There are many different criteria and ways to slice and dice employee classification, but practically speaking, companies need tools that help them navigate this terrain. This is where a Freelancer Management Platform like AllWork can help.
Why you need a Freelancer Management Platform
Most managers have much more important things to worry about than tax laws and employment classifications. This is where a centralized management platform for your freelancers can save the day. Rather than collecting information manually or with several different tools, a technology solution can take on the burden of current classification for you – helping to reduce legal risk.
Now, everyone at the company is on the same page and has access to all of the onboarding, projects, timelines, and payments for their freelancers. One system of record becomes critical to answering questions from the Department of Labor or the IRS that the CFO or CLO and any business can reference. You need to know how many freelancers you work with and the type of work they are doing for your business.
Ultimately, companies need a Freelance Management platform to keep all management and payment processes streamlined and save them time that can be better spend on important business goals.