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Contracting

R.A. Rodriguez & Associates, Inc., is a back-office service that becomes the legal W-2 Employer of Record™ for contract candidates. This service is identical to our Employer of Record service with one exception. With the Employer of Record™ service, we take your existing contract employees off of your payroll, and put them onto ours. With our contracting service, we conduct a full recruiting effort to locate qualified contract candidates for your firm.

We then handle all of the financial and administrative responsibilities associated with contract employees. We process the employee’s weekly payroll, handle taxes, insurance, workers’ compensation, etc. In addition, we offer a wide range of employee benefits. And approximately 2,400 executive recruiters are affiliated with our network and can assist you with the search process to locate qualified contract candidates to meet your specific needs.

Our service will allow you to reduce your overall staffing costs and increase your staffing flexibility without the time consuming administrative and financial responsibilities associated with contract employees. You can also reduce your legal liability by ensuring that contract employees are classified correctly. We can help you achieve these goals by taking advantage of the benefits and perks of contract staffing:

• Outsource Labor Accounting
• Eliminate Payroll Tax Issues
• Reduce Benefit Administration
• Reduce Unemployment Exposure
• Reduce Workers’ Compensation Exposure
• Containment of Permanent Staffing Levels
• Maintain Budget Controls
• IRS Protection Against Employee Misclassifications
• Eliminate "Bad" Press from Layoffs
• Increase Protection from Lawsuits

Added Benefits:

Insurance Protection:

Every contract employee of R.A. Rodriguez & Associates, Inc. is covered by a comprehensive package of insurance to protect our clients. This package includes:

• $2,000,000 of Commercial General Liability
  
• $1,000,000 of Hired and Non-owned Automobile Liability
  
• $4,000,000 of Excess Liability
  
• Statutory Workers' Compensation
  
• $1,000,000 of Employers' Liability
  
• $1,000,000 of Professional Liability
  
• $1,000,000 of Employee Dishonesty Bonding
  
• $25,000 of Forgery Bonding

Drug Screenings:

R.A. Rodriguez & Associates, Inc., has the ability to provide drug screening on specific candidates at the client’s request. A national account has been established with a certified drug screening facility. We will process the chain of custody form and direct the candidate to a local collection site. Testing can be done on a pre-placement or post-placement basis.

Background Investigations:

R.A. Rodriguez & Associates, Inc., also has the ability to provide confidential background investigations at the client’s request. Upon receipt of a release form from the candidate, we coordinate this effort through a national investigation firm. Criminal records and employment history will be researched.

We also have the ability to meet both the client and candidates’ needs with regard to their own unique payment or billing circumstances. To assist the recruiter with the negotiation phase of candidate pay rates and client bill rates, we utilize the Top Echelon "Financial Quote by Phone." The quote takes into consideration all the mandatory Federal and State taxes, insurances and benefits. The quote also provides the hourly income for the recruiter.

Candidate Pay Rates:

Traditionally, a contract candidate is paid on an hourly basis, but some unique situations allow for a salary structure. Additionally, issues such as per diem and overtime often need to be addressed. Providing the candidate meets I.R.S. guidelines, we will calculate allowable per diem limits on a case-by-case basis. Normal per diem payments follow the IRS "High-Low" averaging method. This data will be tracked and processed through our Accounting Systems. With regard to overtime payments, we comply with the Fair Labor Standards Act to determine the amount due for specific job descriptions and hourly wage guidelines.

Client Company Bill Rate Structures

R.A. Rodriguez & Associates, Inc., traditionally defaults to an hourly bill rate for W-2 contract employees. Our standard invoicing procedure is weekly. In specific situations, other arrangements can be made to accommodate the clients’ needs. Our network’s computerized systems provide key tracking capabilities, while also providing flexibility to our clients.

Important Contracting Information

1099 Controversy

In recent years, the IRS has begun to realize the large sums of potential tax revenue they are losing due to misclassified 1099 independent contractors who should legally be W-2 employees. When a company pays a contractor on a 1099-misc form, they avoid the following: federal and state tax withholdings, deposits and reports, the employer’s share of Social Security and Medicare taxes, state and federal unemployment insurance premiums, state disability insurance premiums, Workers’ Compensation costs, fringe benefits, vicarious liability for employee negligence, and EEOC regulations. Similarly, when contractors are paid on a 1099, the contractor can deduct many business expenses, and as a result, pay much less in taxes each year. The IRS estimates that it loses between $4 to $20 billion per year in unpaid taxes as a result of this misclassification problem. Understandably, the IRS has made it a priority to investigate 1099-misc forms that are turned in at the end of the tax year. The IRS is conducting audits to determine whether or not contractors are being properly classified. Many large companies that all of us are familiar with have recently been audited, some of these companies include: IBM, Sybase, Microsoft, and Time Warner, just to name a few. After being audited, these companies have been assessed huge fines for being in violation of laws that determine whether an individual should be paid on a 1099 or a W-2.

W-2 vs. 1099

When a person is paid on the form W-2, the employer automatically withholds and pays all of the necessary employee income taxes as required by the IRS. These taxes include: Federal Income Tax, State Income Tax, and FICA (Social Security and Medicare). In addition, the employer will pay all of the necessary employer taxes. These taxes include: FICA (Social Security and Medicare), FUTA (Federal Unemployment Tax), and SUI (State Unemployment Tax).

When a person is paid on the form, 1099-misc, all money earned by the individual is paid on an untaxed basis. It is then the responsibility of the individual to file and pay the appropriate taxes.

Could the contractor be considered an independent?

An individual that is an independent contractor fills the following roles:

• The independent contractor will work with a number of clients.
• The independent contractor's role is to accomplish a final result and it’s the independent contractor who will determine the best way to achieve that result.
• The independent contractor will define what the agreed upon "result" is in a contract with your customer.
• The independent contractor pays his/her own taxes and files the required government forms.
• A city license, business license, and a fictitious name or dba statement will be obtained by the independent contractor. Also, the independent contractor must obtain any necessary permits.
• Social Security taxes are the sole responsibility of the independent contractor.
• The independent contractor must obtain his/her own benefits including workers' compensation, disability, etc.
• The independent contractor is not entitled to any typical employee benefits from any government agency.
• The independent contractor can deduct business expenses from his/her income tax.

Does Incorporation Matter?

There is a lot of confusion regarding independent contractors. Many employers realize that it is not a good idea to pay contractors on a 1099, but believe that if the worker is incorporated, it is okay. This is not necessarily the case. It is very simple to obtain a Federal Tax ID number for a business. This ID number is not an automatic protection from misclassification.

As always the IRS’ 20 Point Checklist comes into play. Ultimately, the IRS is going to look at the work environment and who has control. An individual that is incorporated and working at a company could easily be considered an employee depending on the circumstances.

Three Main IRS Factors

Basically, the IRS’ 20-Point Checklist focuses on three main factors:

• How much control the employer has over the worker’s behavior and work results. (Who controls training, where and what time the person works, what equipment they use?)
• How much control the employer has over finances? (Does the employer have primary control over the person’s profit or loss?)
• What is the relationship between the parties? (Does the worker receive benefits? Is it a long-term relationship?)

IRS Questions in Court

Ask the five questions one court asked an employer (company) when considering whether workers were common-law employees:

1. Who recruited them? (Recruiter/company = more risk.)
   
2. Who trained them? (Company training = more risk.)
   
3. What was the duration of employment? (Longer assignment = more risk.)
   
4. Did you have the right to assign extra work? (Yes = more risk.)
   
5. Did you have control over such things as firing, discipline, and rewards? (Yes = more risk.)
   

The IRS 20-Point List

The IRS has established a 20-point checklist the can be used as a guideline in determining whether or not a contractor can legally be paid on a 1099. This checklist helps determine who has the "right of control." Does the employer have control or the "right of control" over the individual's performance of the job and how the individual accomplishes the job? The greater the control exercised over the terms and conditions of employment, the greater the chance that the controlling entity will be held to be the employer. The right to control (not the act itself) determines the status as an independent contractor or employee. The 20-point checklist is only a guideline, it does not guarantee that a person is correctly classified. There is no one single homogenous definition of the term "employee." Most agencies and courts typically look to the totality of the circumstances and balance the factors to determine whether a worker is an employee.

Following are the 20-points that have been established:

1. Must the individual take instructions from your management staff regarding when, where, and how work is to be done?
2. Does the individual receive training from your company?
3. Is the success or continuation of your business somewhat dependent on the type of service provided by the individual?
4. Must the individual personally perform the contracted services?
5. Have you hired, supervised, or paid individuals to assist the worker in completing the project stated in the contract?
6. Is there a continuing relationship between your company and the individual?
7. Must the individual work set hours?
8. Is the individual required to work full time at your company?
9. Is the work performed on company premises?
10. Is the individual required to follow a set sequence or routine in the performance of his work?
11. Must the individual give you reports regarding his/her work?
12. Is the individual paid by the hour, week, or month?
13. Do you reimburse the individual for business/travel expenses?
14. Do you supply the individual with needed tools or materials? \
15. Have you made a significant investment in facilities used by the individual to perform services?
16. Is the individual free from suffering a loss or realizing a profit based on his work?
17. Does the individual only perform services for your company?
18. Does the individual limit the availability of his services to the general public?
19. Do you have the right to discharge the individual?
20. May the individual terminate his services at any time?

Why do contractors want to be paid on a 1099 vs. W-2?

• The IRS has found that when an individual is responsible for paying his/her own taxes, etc., many times it is not as much as it would be when the employer is paying the correct tax amount. This is primarily due to contractors taking full advantage of any potential business deductions so that they pay less in taxes.

Why do companies want to pay contractors on a 1099?

• Managers are trying to meet budget constraints. When a company pays a contractor on a 1099, the employer avoids the cost of employee benefits, employer taxes, etc. These taxes can be between 13-19% of the contractor's pay. To many managers, these savings are well worth the risk of misclassifying.
• Managers do not want to pay according to the Fair Labor Standards Act, FLSA (overtime pay). In addition to not paying employer taxes, when a manager pays on a 1099, they do not need to follow the guidelines of the FLSA. The biggest impact of this is in overtime hours worked. According to the IRS, a person paid on an hourly basis must be paid time and one half for each hour worked over forty hours (there are a few exceptions to this rule, see FLSA write-up for more details). By paying on a 1099, the employer avoids this extra expense.
• Contractors are insisting on it. Many uninformed contractors insist on being paid on a 1099. The impact of misclassifying is much greater on the client. This leaves the burden on the client to determine whether or not they are true independent contractors. Many contractors feel that they should be paid on a 1099 because they are only doing a project for the client. Many individuals, especially the ones with rare skill sets are demanding that they be paid on a 1099 or they will go elsewhere. Unfortunately the client is the one who faces the most in fines, etc., if and when there is an audit. The contractor may have to pay back taxes, etc., but the IRS usually goes after the entity with the "deepest pockets." It is easier for the IRS to audit and collect penalties from one company than from hundreds of individuals.

If incorrectly classifying contract employees is illegal, why are so many companies doing it?

• They have not been audited, yet. Many companies and contractors thought they found a loophole in the tax laws and decided to utilize the form 1099-misc. This may be a great fix for those that have not yet been audited. Unfortunately, the IRS has decided to crack down on the misuse of this form. For many companies and contractors that have not been audited, this still seems to be a great solution; the reality of misclassifying has not had a negative impact on these people.
• They have the attitude, "if it is not broken, don’t fix it." By never experiencing an audit by the IRS, or having to pay back taxes and fines, it is difficult to persuade clients and contractors that it is risky or that it is wrong. Many clients may say that they have always done it this way and don’t see any reason to change.
• They do not know it is illegal. Many companies may not be current on all laws. Years ago, the IRS’ crackdown on 1099s vs. W-2s was not as great. As they have found abuse of classifications, they have increased their focus on this problem. Many clients may not be aware of this and therefore continue to misclassify, simply due to lack of knowledge.

You're in Good Company!

Our service provider, Top Echelon® Contracting, Inc., has placed contract employees at the following client companies: