Vendor Compliance Affects How You Are Paid


As an independent consultant, at some point you will likely be asked to go through a client’s vendor compliance process. This is more than just being set up as a vendor to get paid. A vendor compliance program is designed to determine how you are paid, either as an independent business on a 1099 tax basis, or as a temporary employee on a W-2 tax basis.

When paid on a 1099 tax basis you are paid as an independent contractor. You are responsible for calculating and paying your own taxes quarterly. You also become eligible for certain business-owner tax deductions and retirement plans.
When paid on a W-2 tax basis, you are an employee of the company that pays you. Your taxes are automatically deducted from your paycheck and paid to the government through the employer of record. This is usually a third-party agency, not your client.


As a self-employed professional, it is much, much better to be paid on a 1099 tax basis. (Be sure to watch our 2-minute video to understand why. More information can also be found here.)

The problem is, most vendor compliance processes are overly difficult and complicated, designed for you to fail so that you have to be paid on a W-2 basis.

Fortunately, PICA is here to help. These articles and the related web workshop are designed to teach you how to successfully navigate the toughest vendor compliance process so you can preserve your 1099 tax status and the related benefits of being self-employed.

What is vendor compliance and co-employment risk, and why should I care?

Companies face co-employment risk whenever they hire a non-employee worker, including consultants. It's the risk of being sued by the workers for lack of employee benefits, and the risk of failing a labor audit which results in significant fines and penalties.

It's because of lawsuits and penalties that corporations are afraid to hire independent contractors.

Nearly all large corporations have implemented vendor compliance programs and/or outsourced the handling of non-employee workers to third party firms like PRO Unlimited, MBO Partners, ICon Professional Services, Agile 1 and ZeroChaos among others. (See box below to understand why.)

This situation is costly for both the client company and the consultant.

 

Understanding How We Got Here.
Vendor compliance exists because companies are afraid of co-employment risk - the legal and financial risk associated with misclassifying a non-employee worker (a consultant) as an independent contractor when the worker is actually being treated like an employee. Understanding why companies are afraid of this risk can help you navigate the compliance process, and also help your client mitigate the risk. [read more for free ...]

 

For client companies – Most HR departments are over-compensating and over-paying to mitigate co-employment risk. They have been persuaded by their compliance partners to set ridiculously high hurdles to qualify as an independent business. For example, requiring a business to be incorporated or have 3 or more employees. There’s no case law to support these arbitrary hurdles yet they exist. When consultants can’t satisfy the high requirements, they’re asked to be paid on a W-2 basis through the staffing or compliance firm. This usually adds a 15-20% admin fee to the consultant’s rate, often straining a project’s budget.

For consultants Being paid on a W-2 tax basis jeopardizes their business owner tax deductions and retirement plans. Some independent consultants actually turn down work if they have to be paid on a W-2 tax basis.

The easiest way to learn how to navigate a vendor compliance program is to participate in PICA’s live virtual roundtable, but here is additional info to get your started.

PICA members have access to members-only content in this section, as well as web workshops, virtual roundtables, and PICA Office Hours. Non-members and members alike can access free content below, and ask questions on PICA's Facebook page.

Foundational Compliance Concepts

Lifecycle Stage Title Description
Common Law Guidelines for Contractor vs Employee Understanding the U.S. government’s common law guidelines will help you position your consulting practice as an independent business.
Temporary Employee vs. Independent Contractor Whether you call yourself a consultant, contractor, or freelancer, the only status that really matters is how you are classified and paid by your client. Be sure you understand the various labels and terms.
Beware of Staffing Agencies Like a wolf in sheep's clothing, staffing agencies promise to relieve independent consultants of arduous tasks like prospecting, billing, and paying quarterly taxes. These"benefits" come at a significant price.
Legal Alert: Court Ruling Makes Independent Contracting More Difficult: What to Do As a self-employed consultant, it's getting harder to qualify as an independent contractor, especially in light of the California Supreme Court's April 2018 ruling. Find out what you need to do to maintain your 1099 tax status.
Understanding the U.S. government's common law guidelines will help you position your consulting practice as an independent business.
Whether you call yourself a consultant, contractor, or freelancer, the only status that really matters is how you are classified and paid by your client. Be sure you understand the various labels and terms.
Like a wolf in sheep's clothing, staffing agencies promise to relieve independent consultants of arduous tasks like prospecting, billing, and paying quarterly taxes. These "benefits" come at a significant price.
As a self-employed consultant, it's getting harder to qualify as an independent contractor, especially in light of the California Supreme Court's April 2018 ruling. Find out what you need to do to maintain your 1099 tax status.

Compliance Resources

Lifecycle Stage Title Description
20 Questions to Qualify as an Independent Contractor Most vendor compliance processes are based on a 20-point checklist established by the IRS to determine a worker’s status. This impacts how you are paid -- on a 1099 tax basis or a W-2. Understanding the intent behind these questions will help you answer them as an independent business so you can preserve your 1099 status.
Red Flags When Being Set Up as a Vendor Be careful when contracting with larger clients. Know the warning signs so you don't get ushered down the W-2 payment path.
Preparing for a Compliance Process Independent consultants are usually screened to determine if they qualify as an independent contractor. This process is intended to mitigate co-employment risk for the client, and it determines how the consultant will be hired and paid.
Most vendor compliance processes are based on a 20-point checklist established by the IRS to determine a worker's status. This impacts how you are paid -- on a 1099 tax basis or a W-2. Understanding the intent behind these questions will help you answer them as an independent business so you can preserve your 1099 status.
Be careful when contracting with larger clients. Know the warning signs so you don't get ushered down the W-2 payment path.
Independent consultants are usually screened to determine if they qualify as an independent contractor. This process is intended to mitigate co-employment risk for the client, and it determines how the consultant will be hired and paid.

Related Tools, Services, and Events

Lifecycle Stage Tool/Service/Event Description
Web workshop: Navigating the Vendor Compliance Process
Offered several times a year: see our calendar
The stakes are high: if you fail the vendor compliance process, you'll have to be paid on a W-2 tax basis. Learn how to interpret compliance questions and how to respond.
Virtual Roundtable: Keeping It Legal as an Independent Consultant
Offered several times a year: see our calendar
We all want to get paid on a 1099 business-to-business basis to maximize our tax deductions. PICA's General Counsel explains how to maintain your independent status.
Virtual Roundtable: Keeping It Legal as an Independent Consultant
Offered several times a year: see our calendar
Ask PICA's General Counsel how to address your compliance challenges. (This virtual conversation is limited to 20 PICA members at the All-In level.)
Web workshop: Insurance Basics for Self-Employed Professionals
Offered a few times a year: see our calendar
What types and levels of insurance do you need to have to be in compliance? This session is facilitated by PICA's insurance partner, CoverWallet.
Virtual Roundtable: Getting the Right Type and Level of Business Insurance
Offered a few times a year: see our calendar
Business insurance needs change along with the type of work you do, and the type of clients who hire you. Get your questions answered in this live session hosted by PICA's insurance partner, CoverWallet. (Due to the limited capacity of this session, it is available only to PICA members at the All-In level.)

Web workshop: Navigating the Vendor Compliance Process

Offered several times a year: see our Calendar

The stakes are high: if you fail the vendor compliance process, you'll have to be paid on a W-2 tax basis. Learn how to interpret compliance questions and how to respond.

Virtual Roundtable: Keeping It Legal as an Independent Consultant

Offered several times a year: see our Calendar

We all want to get paid on a 1099 business-to-business basis to maximize our tax deductions. PICA's General Counsel explains how to maintain your independent status.

Virtual Roundtable: Keeping It Legal as an Independent Consultant

Offered several times a year: see our Calendar

Ask PICA's General Counsel how to address your compliance challenges. (This virtual conversation is limited to 20 PICA members at the All-In level.)

Web Workshop: Insurance Basics for Self-Employed Professionals

Offered several times a year: see our Calendar

What types and levels of insurance do you need to have to be in compliance? This session is facilitated by PICA's insurance partner, CoverWallet.

Virtual Roundtable: Getting the Right Type and Level of Business Insurance

Offered several times a year: see our Calendar

Business insurance needs change along with the type of work you do, and the type of clients who hire you. Get your questions answered in this virtual roundtable hosted by PICA's insurance partner, CoverWallet. (Due to the limited capacity of this session, it is available only to PICA members at the All-In level.)