There has always been a battle between the W-2 and the 1099 people who assist your business, however, the federal government and many states in need of additional revenue are starting to really crack down and audit businesses classifications – and hefty penalties can be associated with those (think back pay, taxes, liability for workers comp, company benefits including healthcare, fines and interest penalties). It’s certainly not pleasant to think about…and you will want to be prepared for a potential audit. As the old saying goes, it’s not a matter of IF, you will get an audit, but WHEN you will get an audit.
The IRS has a 20 factor test (Rev. Rul. 87-41 provides 20 common law attributes); the Department of Labor has an “Economic Reality Test” that touches on about 7 elements; and the State of Arizona likes to consider the totality of the circumstances and puts an emphasis on the right of control without any particular single factor being conclusive.
In this situation it is better to be proactive than reactive…it could save you $$$ and possibly even your business. Plus, there are some safe harbors and ways to help address the issue ahead of time that may save you big $$$.
If you aren’t sure whether you have your Independent Contractor classified correctly, and you are an Arizona resident/business, I can assist you in walking through the elements. You can also file an SS-8 Form to have the IRS make a determination for you. That form can be found at the following URL: https://www.irs.gov/uac/About-Form-SS8.