1099 Classification Screening Should be the Contractor’s Responsibility
Companies shouldn’t have to pay to validate the 1099 independent contractor status of the freelancers they hire; nor should companies be solely responsible if a misclassification claim is the result of contractor non-compliance with 1099 qualification criteria. Those burdens should be borne by the contractors themselves. Companies don’t pay for the 1099 contractor’s commercial business insurance, nor do they pay for the 1099 contractor’s SHRM, CPA, PMP, CISSP or any other certification. So why should the hiring company pay to “certify” a freelancer’s 1099 qualifications?
The 1099 Contractor Certification Solution
Client organizations that engage 1099 contractors should be able to request and receive independently provided certification directly from the contractor, much like when client organizations require a valid certificate from minority or woman-owned business enterprise (M/WBE) vendors. To establish credibility with hiring companies and to ensure their safe and protected use of the 1099 certified contractor, the 1099 certification should be underwritten by an independent third-party organization that unilaterally extends protections to client organizations relying on the 1099 certification. The 1099 certification underwriter should govern the entire certification process including the screening of the contractor qualifications and the issuance of the 1099 certification in accordance with applicable local, state, and federal agency regulations and relevant case law that relate to the freelancer’s status as an independent contractor (IC). Like other professional certifications and licensing, the 1099 certification should be an annual requirement.
Importantly, the certification should require contractors to maintain a minimum level of education and awareness about 1099 contractor best practices and the risks to both contractor and client of engagements that are deemed to be improperly classified as 1099. This awareness training will mitigate one of the most common triggers to misclassification inquiries, behavior of the 1099 contractors themselves.
Portability of Certification is Key
The inherent nature of being a 1099 independent contractor involves engagements with multiple clients throughout the tax year. The 1099 certification should be portable and universally accepted as a standard, just like other certifications and licenses that hiring organizations look for when sourcing the talent they need. This portability will create efficiencies for the contractor and provide a meaningful standard for the client community.
1099 Certification Should Support Bigger Classification Picture
Formal 1099 classification occurs at the engagement level, effectively involving one-part contractor qualifications and one-part client engagement structure and management. Given this fuller picture of classification requirements, the 1099 contractor certification solution must be met by a 1099-ready engagement with the client, one that is supported by an appropriately structured independent contractor agreement and one that is actually managed in accordance with the terms of that agreement.
Formal classification of the 1099 engagement is the client organization’s ultimate responsibility as evidenced by their filing to the IRS and issuance to the contractor of Form 1099-Misc. There are other aspects of 1099 classification that clients must contemplate: the going concern nature of the independent contractor’s business, commercial business insurance coverage, where the contractor and company are domiciled, where the work takes place, the type of work or service the contractor delivers to the client organization, and more. These risk-critical data should be validated and provided via the 1099 contractor certification. The underwriter should monitor the contractor status during the certification period and notify identified clients of relevant risk-impacting changes.
Client Benefits of the 1099 Contractor Certification Solution
In today’s traditional 1099 compliance environment, companies take on the entire responsibility for screening the contractor and putting the independent contractor agreement in place, either directly or through use of an IC compliance solution provider, also known as a compliance intermediary. The 1099 contractor certification solution should support both methods of 1099 contractor engagement.
Highlighting 1099 Certification Upfront
When a company is considering qualified freelancers, the 1099 certification should be supplied along with the contractor’s resume or proposal, thus informing the client organization that the contractor is qualified for and is safe to engage as a 1099 contractor. Similar to how contractor talent highlight their skills-based certifications, contractors should adapt the practice to include their 1099 certification designation on their resume, on their business cards, and on their email signatures. Digital freelance platforms and market places (i.e. talent pools, freelance management systems, vendor management systems, job boards, LinkedIn, etc.) should enable 1099 certified contractors to badge their digital profiles. Client organizations should seek the 1099 certification during talent sourcing, writing it into their requirements and postings.
1099 Certification Referrals
If the contractor is not yet 1099 certified, then the client organization should be able to refer the candidate contractor to the underwriter, making 1099 certification a prerequisite for engagement as a 1099 contractor. The underwriter should have a web-based portal to facilitate this contractor referral process.
The Role of Compliance Intermediaries
Compliance intermediaries should have the same access to the 1099 certification and protections enjoyed by client companies that engage 1099 contractors directly. By leveraging the 1099 certification solution the compliance intermediary will off-load a material portion of the misclassification risk to the certification underwriter (i.e. the 1099 contractor associated risk) and they will not have to invest the time nor the resources to conduct the contractor screening and gather and maintain the supporting documentation. With this meaningful shift of risk and operational cost, it is not unreasonable to think that the intermediary would be able to extend to the client organization a proportionately discounted price for their services while substantially maintaining their margins for the remaining services they still must provide the client.
Faster Engagement Starts
Regardless of how client organizations engage their 1099 contractor talent, they should benefit from a shorter 1099 contractor screening and onboarding cycle time. It takes about 7-15 days for a new 1099 contractor to be screened and on-boarded in the traditional IC compliance model. By having the 1099 certification and supporting documentation in the hands of the client or the client’s compliance intermediary on day one, 1099 contractor engagements can start up to 50% faster.
Benefit of 1099 Certification Solution to the Freelancer
Freelancers will benefit from 1099 certification by starting projects faster and from the efficiency gain of not having to provide the same documentation, respond to the same types of screening surveys, and answer the same questions over and over again every time they enter into a new client engagement. The 1099 certification process should only have to be completed once, then the certification underwriter should take over for delivery of the required information and documentation on the contractor’s behalf.
Those contractors who proactively present themselves as 1099 certified should receive preferential recognition from those client organizations seeking 1099 qualified talent. This differentiation should lead to more business in the ever-competitive marketplace for talent.
Portability and differentiation will be the primary drivers to all contractor benefits.
IC Precheck is 1099 Certification
IC Precheck is the “1099 contractor certification product” described above. The content of this article effectively represents portions of the business case and early product design that the founders and creators of IC Precheck developed in 2018. Everything noted herein is an actual feature of IC Precheck and is readily available today at icprecheck.com.
Two notable enhancements have been made to the core IC Precheck solution since its original inception.
To further enable client companies and third-party IC compliance providers to search the population of IC Precheck certified contractors and to make it easier for them to refer contractors to IC Precheck for certification, an online Client Portal has been developed. Only a simple registration and email verification is required to become a Preferred Client Organization with IC Precheck. There are no contracts and no fees required.
To solve the problem of IC business insurance coverage when engaging 1099 freelancers, IC Precheck has developed partnerships with two of the industries foremost providers of specialized IC and small business insurance, Bunker and Coterie. Now, actual and prospective certificates of insurance are included in the IC Precheck Compliance & Due Diligence Package provided to client organizations and IC compliance intermediaries.
Does your company engage freelancers as 1099 contractors? If not, would doing so open up new talent channels for your company? Consider making IC Precheck certification a prerequisite for engagement at your company. Engaging 1099 talent just got safer and easier!