Independent contractors (IC) are non-employee workers hired to perform a set task or a series of tasks. The independent contractor is considered to be self-employed, responsible for having proper insurance, paying taxes and paying workers or themselves. Based on their IRS classification, independent contractors are also known as 1099 workers.
In the oil and gas industry, independent contractors are typically engaged as technical professionals or subject matter experts with the knowledge and skills necessary to complete certain aspects of complex projects. Although the skills needed for these tasks are highly specialized, they translate easily from project to project, allowing an independent contractor to come into a project to perform a specific function, and then leave to perform the same function on another project.
There is a heavy reliance on the use of independent contractors in the energy industry because of its project-driven nature. Companies hire contractors because they bring in skills that are not available internally, or because they do not have enough employees to cover the needed skill set on all projects.
This situation is no longer unique to the oil and gas industry, and represents a significant evolving shift in the make-up of the overall US workforce. Staffing Industry Analysts predicts the average mix of contingents in the Fortune 100 to increase from 20-30% to 50% by the year 2020. The increase of contingents will be a catalyst for the emergence of the Contingent Workforce Officer (CWO) in the C-Suite. The CWO will focus on the optimal workforce mix to best support organizational objectives.
IRS Requirements for Independent Contractors
The use of the contingent workforce also brings an increased importance in following 1099 compliance laws. Taxes for an employee are very different than those for a contractor, including withholding and employment tax requirements, exclusions and deductions. Some of these differences favor employee status, while some favor contractor status.
To determine whether someone is an employee or a contractor, the IRS has established a set of twenty questions called the “Common Law Test”. If the IRS determines that a worker has been misclassified, there can be significant tax consequences to the company, including penalties, back tax assessments, interest payments and retroactive benefits. (See figure below)
The IRS is increasing efforts to end worker misclassification with the current federal budget allocating $46 million to investigate and prosecute violations. The IRS is also encouraging employers to take a greater responsibility in becoming compliant by instituting the Voluntary Classification Settlement Program in 2011. This allows eligible taxpayers to reclassify their workers as employees for future tax periods, and thus receive partial relief from past worker misclassifications. However, the IRS reserves the right to exclude companies from the program.
So what is the solution? →Manage Contingent Workers as a part of your Total Workforce
To prevent misclassifications and a future tax audit, companies need to install a formal, structured program for the management of their contingent workforce and should include the following three components:
- Compliance testing using a third-party
Compliance testing should be your first step in contingent workforce management. The IRS requires a company to provide proof of compliance whenever they use a non-employee on a project. Using a third-party for testing can provide the following:
- Written report with a classification determination
- Documentation for existing and new contractors
- Defense file for qualified independent contractors
- Solutions for engaging misclassified workers
- Statement of Work (SOW) Management
The use of independent contractors has created a need to have better visibility into the engagement side of using an IC and have a proper understanding of the scope of their work. SOW management can help your company become 1099 compliant – or measure ongoing compliance – by providing a central point for all work orders to make sure that they meet contractual requirements, and include a complete work description, start date, end date, deliverables, and rates. An emerging trend for SOW management is to be combined with a managed staffing program or staffing solution.
- 1099 compliance through engaged staffing agencies
When using a staffing agency, it’s important to choose one that is diligent with 1099 compliance. Staffing agencies that include independent contractor compliance services evaluate their independent contractors to make sure that they meet IRS requirements for self-employment. Using 1099 workers who have been screened for compliance reduces the risk of misclassification as a company employee.
Contingent Management is Risk Management
Complying with 1099 regulations is more important than ever, especially in the oil and gas industry. To avoid being penalized for misclassification, it’s important to ensure compliance testing, SOW management, and the use of contingent workers who are already 1099 compliant. A comprehensive contingent workforce management program can help your company avoid the penalties that come with worker misclassification. For additional information on classifying a worker as an employee vs. an independent contractor, read the IRS guidelines.
Clover specializes in placing professionals in the oil and gas industry. If you are an Operator seeking to augment Project Teams, contact Jeff.W@clovergs.com
If you are an experienced professional looking for opportunities in the Upstream Industry (Alaska, Eagle Ford Shale Play, Bakken Formation, Deepwater Gulf of Mexico), send your resume in complete confidence to Chris.S@clovergs.com