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December 11, 2019

Q: Why do I need to separate my W2 employee and freelancer / 1099 independent contractor data?

Don’t put your company at risk for liabilities and penalties due to violations of tax laws.

Ask Liquid: Why do I need to separate my W2 employee and 1099 freelancer data?

Compliance Ask Liquid

Many behavioral, financial, and relationship control factors determine whether you are actually hiring a W2 employee or a 1099 independent contractor. The underlying concept is that you must treat your full-time employees and your 1099 workers differently. If you and your business were sued or you had to otherwise defend your use of workers as 1099 independent contractors, the separation of data goes toward showing a different treatment. 

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These different types of workers, freelancers / 1099 independent contractors, and W2 employees shouldn’t be on the same management system.

Startup lawyers frequently tell us that one of the first things they do when they are brought in to work with a startup is to review their employment & 1099 practices. These startup lawyers are typically brought in when the company has grown in size and revenue. These lawyers recommend immediately separating the 1099 workers’ data from the full-time employee systems. 

This separation is similar to how companies have adopted the use of third-party companies to source and contract with 1099 workers. And it relates to the ABC test: if you have independent contractors on the same systems that are used to manage employees, you are more at risk of violating the ABC test.

And if you are violating the ABC test, you put your company at risk for liabilities and penalties due to violations of tax laws.

Ready to get started separating out your freelancer / 1099 independent contractor data from your W2 employee data? Sign-up for Liquid beta today!

Category: Compliance Ask Liquid

Updated: December 11, 2019

Quick note: This is not to be taken as tax advice or legal advice or payroll advice. Since tax rules and laws change over time and can vary by location and industry, consult a CPA / tax advisor and/or attorney for specific guidance.

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