New 1099 Law Pierces the Corporate Veil of Hidden Independent Contractors

The impacts of the new healthcare laws on contingent workforce management will not be fully understood for some time, and could be subject to change before they take effect. But some provisions of great concern are approaching rapidly, including a little understood and newly highlighted 1099 reporting provision slated to take effect on January 1, 2012.

Like the proposed Employee Misclassification Prevention Act (EMPA) bill, this new requirement would “pierce the corporate veil” of hidden independent contractor vendors and require immediate discovery and control over challenging spend categories such as statement of work consultants and sub-contractors.

According to Michael Tanner, a senior fellow of the CATO Institute:

The latest surprise is Section 9006(b)(1) . . . which requires that businesses provide a 1099 form to every vendor with whom they do more than $600 worth of business over the course of a year. . . Of course businesses already have to file 1099s for outlays on items like consultants. But the new rule will mean that even the smallest of businesses will have to issue a form — and file with the IRS — for virtually every purchase or payment. Consider how many business transactions go on every single day in a $14 trillion U.S. economy. Millions, perhaps hundreds of millions, of forms will be winging their way between businesses and between businesses and the IRS. The potential for mistakes and lost forms would be tremendous. And with errors come audits and penalties.”

With legislation like this already passed into law, there is no need to wait for the Employee Misclassification Prevention Act to start bringing SOW consultants and incorporated independent contractor vendors — including project services spend — into your centralized Contingent Workforce Management program.

You will be required to not only track this spend, but issue 1099s, starting in just a year and a half. Given the tremendous amount of organizational change such a requirement represents, enterprises should look to starting the process of a deep contractor risk assessment now.

After all, even if this particular provision affecting 1099s laws is extended or overturned, the message from legislators and regulatory agencies is clear — there will be no more hiding of independent contractors for purposes of misclassifying workers.

If you already have a managed CWM program, check with your VMS or MSP program providers and find out if they work with an Independent Contractor Engagement Specialist (ICES) that has expertise in capturing independent contractor spend and, in particular, SOW and project spend.

If not, call Cutting Edge at 561-910-8000 today. We can provide you access to one of these experts.

Posted by Liz Greene via ASA.