A common regulatory mistake (especially among startups in their desire to save money) is misclassifying employees (W-2) as independent contractors (1099). Many authorities are increasingly considering people performing work in a given company’s customary business activities to be employees, not contractors. The issue is taxes. States cannot readily collect payroll taxes independent contractors. There are various legal tests used to determine whether or not an individual is performing work as an independent contractor or employee. All such tests deploy factors to answer the following question: How much control does the employing unit exercise over the contractor? Factors to make the foregoing determination include, but not limited to, whether or not the contractor: (i) has the right to accept or decline requests for services by or through the employing unit; (ii) is economically dependent on the services performed for or in connection with the employing unit; (iii) has control as to when or where the services are performed; (iv) is authorized to determine days worked and the time periods of work on behalf of the employing unit; (v) receives regular salary or any minimum, regular payment; and whether (vi) is responsible for providing and maintaining all tools, equipment, computers, vehicles, and any and all other supplies required to perform the services. No factor is dispositive. Therefore, correctly classifying an individual as an employee or contractor can create a close call.
Arizona businesses, however, do have a safe harbor of sorts. Such employing units can request the independent contractor to provide an executed declaration of independent business status. The form and substance of this declaration is set forth in ARS 23-1601. It results in the contractor declaring (or acknowledging) certain facts as true. Compliance with this declaration creates a rebuttable presumption of an independent contractor relationship between the independent contractor and the employing unit with whom the independent contractor contracts. In the event of an audit, this can prove tremendously helpful. Also, it is a best practice measure.
The information contained in this document does not constitute legal advice.