1099 Contractor vs. W2 Employee Status Problems - Frequently Asked Questions

Is There a Way to Solve the 1099 Contractor vs. W2 Employee Status Problems Without the Legal Risks?

If you are a small business owner in California, you cannot possibly have missed the recent changes in the law regarding retaining independent contractors on staff.

Are you trying to navigate your way through the California Supreme Court’s Dynamex decision – namely the new A.B.C. legal test for 1099 Independent Contractor vs. W2 Employee status?

As you do this, you may be beginning to realize that your own contractors would not pass the A.B.C test.

How much would you give for a simple solution?

The short of it is that, for a very large proportion of businesses both large and small, staffing costs are going up substantially.

We would estimate that of the businesses that use 1099 contractors, more than 70% misclassify them as such. Yet doing so puts them at considerable financial risk. The risks vary from direct financial penalties to extended litigation.

So Why Do They Do It?

Why do small businesses hire people as 1099 contractors rather than taking them on as full W2 employees?

In the short term, it’s a lot cheaper for a business to hire people as 1099 contractors.  It is also less complicated and provides greater flexibility. There is no requirement to provide a minimum wage, overtime, itemized wage statements, rest periods, meal breaks, time off, expenses, and the whole gambit of labor code requirements.

We were in a recent business meeting talking to over 20 other small business owners, all of which had 1099 contractors on staff. When we discussed what those businesses were using the contractors to do, it was very apparent they were, in fact, being treated as employees but paid as contractors. When we asked them if they were concerned about that, as one they responded, “oh, we don’t worry about that stuff”. Crazy but true.

Is There a Good Solution?

Is there a way to solve the 1099 contractor vs. W2 employee status problem without all the legal risks?

Actually, there are two great solutions

  1. Encourage your contractors to set themselves up as individual S corporations
  2. Hire off-shore virtual assistants

Option A

The contractor becomes an S corp.

If a company hires an S corporation to do contract work, the link to the individual worker is broken. By default the way the S corporation operates, there is no link between the employer and the worker. The S corporation is the employer. Labor code violations go out the window because each S corporation has its own employee(s). Even if that is an S corporation of one person.

The 1099 contractor vs. employee A.B.C. test goes straight out the window!

As the S corporation has the employee or employees, it sets up its payroll which will deal with things like overtime compensation, itemized wage statements, compensation for business expenses, meal breaks, and so on.

Clearly, there are some costs associated with contractors converting to S corporations. However, there is also a range of benefits. The savvy business owner currently working directly with 1099 contractors who looks at the A.B.C. test and realizes they are in violation, might incentivize their contractors to convert.

While some contractors might be set up as LLCs, the majority of contractors start out as sole proprietorships. Simply converting over to an S corporation removes the barriers to employment for the contractor and removes the risk to the hiring company.

Don’t take our word for it, we are not attorneys and would not dream of providing legal advice. Instead, talk to a local attorney who is qualified to advise as to how best to navigate these issues.


Is there a way to solve the 1099 contractor vs. W2 employee status problem without all the legal risks?

Option B

Hire Off-shore Filipino Virtual Assistants

When the staff you need do not need to be physically present, a virtual worker on staff can be the ultimate solution.

Current U.S. law assumes employees are domiciled in the U.S.  As your Filipino virtual assistant is domiciled in the Philippines, they are subject to Philippine law. Therefore any tax and labor law requirements are carried by them, not you. Tax is paid by them to the relevant Philippine taxing authority.

1099 contractor vs. W2 employee status problems simply do not apply

The A.B.C. contractor test is also not relevant. You can direct and performance manage your VA as much as you want.

There is, of course, another major benefit with hiring VAs. The cost of a Filipino worker is likely to be a fraction of the cost of a local U.S.-based contractor. See What Does A Virtual Assistant Cost?

Also, when you work with the Smart VA Staffing Agency, your virtual staff in the Philippines are employed by the Smart VA Staffing Agency. Although you set what work they do, give them performance feedback, and they report to you, you are simply contracting with Smart VA Staffing Agency for a service.

Ready for an off-shore virtual assistant? Click here and send us a description of the work you want them to do.