You know that the IRS makes a clear distinction between salaried employees, who receive W2 forms at the end of the year, and independent contractors, who receive 1099 forms. That hasn’t changed. However, the level of enforcement has.
Girding for Battle
Last September, the U.S. Department of Labor (DOL) and the IRS entered into an agreement to step up the agencies’ coordination of efforts to combat employee mis-classification, recoup wrongfully withheld payroll taxes, identify workers entitled to overtime,and improve compliance and education on the subject. Seven states have signed a similar memorandum with the DOL and the IRS: Connecticut, Maryland, Massachusetts, Minnesota, Missouri, Utah and Washington. Four states — Hawaii, Illinois, Montana, and New York — are expected to sign similar agreements in the very near future. The key point is that businesses that use independent contractors — which make up a huge portion of the trenches in live event production — need to prepare for a much higher level of scrutiny starting this year.
The trend for many businesses over the past decade has been towards increasing their reliance on independent contractors. Under the federal wage and hour laws, many employees are subject to overtime and minimum wage requirements, while independent contractors are eligible for neither. Employers in the staging industry in particular use independent contractors, in part due to the seasonal nature of the touring industry. However, the costs of misclassification are significant. The enhanced vetting and enforcement of the 1099/W2 rules are starting at the state level, and the fines are steep. In California, for example, as of January 2012, if the state’s Department of Labor determines that a 1099 was misclassified, the employer can be slapped with a fine ranging anywhere from $5,000 to $15,000 and all the way up to $25,000 if it is determined that the misclassification was intentional and used specifically to avoid liability for workers compensation payments.
It’s easy to see what’s driving stepped up enforcement: As the federal and state governments’ budgets continue to shrink, they are becoming increasingly eager to find additional sources of tax revenue (without actually raising taxes) and maximize the effectiveness of current tax regulations. States are particularly likely to feel these pressures since, in addition to collecting income taxes, they also withhold and manage unemployment and workman’s compensation taxes.
Imminent Risk
Scott Carroll of Take 1, the event division of insurer U.S. Risk, says the implications for the staging business are significant. “The tour sound and rental and staging industries have always relied heavily on 1099 independent contract workers to do a great deal of the work involved in many projects, and they face an imminent insurance risk that could potentially cost companies hundreds of thousands of dollars in penalties,” he cautions.
The recently enhanced enforcement of 1099 rules is of interest to Carroll and to the insurance industry at large, because the fines that come with infractions potentially affect the credit ratings of companies that are dinged with them. That, in turn, increases policy premiums, and can even make companies with enough infractions unable to be underwritten at all. That’s not good for insurance companies’ business, and could be disastrous as the live entertainment industry heads into another touring season that could well be rife with the same costly bad weather as last year, which set a record for weather-induced damages.
As a result, Carroll says Take 1 is planning to introduce a service product with CAPS Payroll, a national payroll services manager with a significant client base in the staging/entertainment industry, including over 30 AEG venues and tours and festivals including Kenny Chesney, Phish, Sheryl Crow, Coachella and Stagecoach. The as-yet-unnamed service will help staging companies better make the distinctions between worker types. The exact nature of the program is still under development, but Carroll says its will be designed to raise awareness about the 1099 issue among live event and staging constituents.
“What we’re looking to create is a seamless, turnkey solution to help rental and staging company owners protect against long-term liability and ensure they meet the proper tax guidelines and avoid hefty government penalties,” he says.
Form SS-8
In the meantime, Carroll offers this advice for employers. “They can ask the IRS to make a determination on whether a specific individual is an independent contractor or an employee by filing Form SS-8, Determination of Workers Status for Purposes of Federal Employment Taxes and Income Tax Withholding,” he suggests. Or, employers could apply the same criteria that the IRS will in the first place: If the business owner has the right to directly control how the work is done through instructions, training or other means, the workers are most likely Temporary Employees (W2). If, however, the owner can direct or control only the final result of the work, and not the means or methods of accomplishing the result, the workers are probably Independent Contractors (1099). Additional factors include whether the business has a right to direct or control the financial and business aspects of the worker’s job, and how the workers and the business owner perceive their relationship.
Carroll acknowledges that complying with a stricter enforcement environment is going to increase the cost of doing business for the affected companies, as the more comprehensive regulations being deployed will create new tax and cost obligations for them. However, he cautions, “companies who think they can beat the new laws and do not react quickly to this new change in regulations will face the possibility of paying major fines in addition to being held responsible for the unpaid taxes.”
And that sucks even more.
