If you haven't heard the news, let me catch you up:
"On January 10, 2024, the U.S. Department of Labor published a final rule, effective March 11, 2024, revising the Department’s guidance on how to analyze who is an employee or independent contractor under the Fair Labor Standards Act (FLSA)."
This is a direct quote from the intro paragraph of the Department of Labor's Press Release about the new ruling.
Read it for yourself:
DISCLAIMER: If you live in states like California, where the labor laws and rights are different, this blog may not cover or specify what impact you may specifically experience with the new ruling.
Just a head's up, this blog may be a bit longer than my usual blogs, but it's worth the read, in my opinion.
Okay, What Does This Mean?
The government established a system that they use to determine if a worker is being misclassified as an employee or a contractor in order to protect your rights and to properly hold companies liable for the appropriate taxes due. With this new ruling, the government has refined that system to make it slightly easier for workers and companies to express their working relationship (especially if contracted). The ruling is to smooth out the process for the government to determine if a worker has indeed been misclassified, regardless.
So what does this new ruling mean for the promo world?
We all have caught on to the fact that the majority of the promo agencies out there either hire you as an employee using a W-2 form or they contract you with a 1099 form. However, for the purpose of this blog, I'm going to focus on the 1099 promo agencies. Thus far, many of us who are signed up as a 1099 contractor with a promo agency are either using our social security number or we're using an Employer Identification Number (EIN) or TIN. Like me, many of us with EINs more than likely also created an LLC with our EIN. Now, with the new ruling, you may have noticed that more promo agencies are now asking for all their 1099 workers to submit an EIN in order to continue booking with them.
Now, before we get started, let's make one thing clear, off top, about this blog before you read any more:
...This blog was not written as a bible of the ruling. Go do you own research.
...This blog is neither a thesis nor an opinion on how promo agencies are handling the new ruling.
This blog was written to announce the ruling to our demographic specifically as promo workers, to speak about some of the fog I had about getting an EIN years ago, and what that meant for me (since everyone's situation is different I can only speak for myself).
But first, let's address a few FAQ:
NOTE: Policies change all the time, so no matter what the answers say below, always do your research in accordance to your own situation.
Do I have to create an LLC in order to get an EIN?
No, you don't need to have an LLC to get an EIN. You can get an EIN without ever having a LLC associated with it. For those who qualify to be able to apply for an EIN, when you fill out the SS-4 form, there is a section that will ask you for the reason/purpose you are applying for an EIN.
How much does it cost to get an EIN?
It's free.
What's the tax benefit of having an EIN?
As a sole proprietor, you'll be taxed the same, but check with your finance advisor or who (or whatever) you resort for lawful financial guidance on the matter.
How long does it take to get an EIN?
Lately, the EIN is assigned immediately but depending on the demand for EIN, it could take some time.
Where do I get an EIN?
Although there are third-party companies that will do it for you, you can definitely obtain an EIN yourself by going to the IRS website, here.
Here's the full link: https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-number-ein-online
What happens if I don't get an EIN, will promo agencies still book me?
That is completely up to the promo agency. You would need to get in contact with their personnel to ask this question.
Here's Some Background...
Over time, too many cases were popping up where companies were misclassifying workers. There wasn't always a clear ruling to make it less confusing for companies to not mistakenly misclassify workers and at the same time, there were companies exploiting the lack of regulations on the matter. So the government created a test of questions that when the answers were all put together would determine if a worker was actually an employee or contractor for tax purposes. This test has now referred to the 6 factors, but I'll get into that later.
Why was this test so important?
Companies that have their workers classified as employees are subjected to different tax liabilities than companies that contract their workers. For the most part, it was likely more expensive to have employee-classified workers than to have contracted workers. Many companies found it more beneficial to classify workers as contractors even though they treated the workers as employees. This is where the conflict of interest lies. It defeats the point to treat a contractor as an employee; and in doing so it inherently violates legal rights that person wouldn't think they're entitled to (making it a win-win for the company). But don't get carried away though, because many companies didn't know they were misclassifying their workers and the government has since taken accountability for not having more efficient regulations in place and now provides more support to getting companies aligned with the tax laws. Those who continue to misclassify their workers will be handled by the IRS accordingly.
The 6 Factors
Instead of talking about the original test, I'll just skip to the current 6 factors that are in place to analyze if a worker is an employee or independent contractor, the final rule provides six factors that businesses and workers should consider when analyzing the economic realities of the working relationship. These factors, described in the economic reality test of the final rule, are:
(1) opportunity for profit or loss depending on managerial skill;
(2) investments by the worker and the potential employer;
(3) degree of permanence of the work relationship;
(4) nature and degree of control;
(5) extent to which the work performed is an integral part of the potential employer’s business; and
(6) skill and initiative.
No one factor or subset of factors determines if a worker is an employee or independent contractor. Rather, all the circumstances of the relationship should be examined. The weight given to each factor may depend on the facts and circumstances of the particular relationship. Also, additional factors may be relevant if they in some way indicate if the worker is in business for themself as opposed to being economically dependent on the employer for work.
SOURCE: Small Entity Compliance Guide
The Debates I Have Seen On Social Media
By no means am I declaring that I know any lawful answers, but I do have a few rebuttals to consider so here we go!
1099 workers should have the freedom to complete the gig how the contractor sees fit!
The argument here is that 1099 workers are contracted, giving the contractor all freedom to determine how to complete the job at their own discretion just as long as the job is done satisfactorily and according to terms like deadlines.
Here are my rebuttals to consider:
That concept is true in certain fields more than others, such as graphic designers, for example. It is common that if you contract a graphic designer, the terms don't include when the graphic designer is to work on the assignment they were given. Just as long as they meet the agreed-upon deadlines. But teachers are contracted, too and they must follow a pre-set curriculum and are required to clock in/clock out, etc. according to the regulations of the district they are teaching in. Even though teachers are contracted, they do not have the freedom to teach whatever lessons they want to teach however they want to teach them. Although, contracted they still have policies to follow.
Let's take it a step further, Beyonce is her own brand. When she does a concert, it's her concert. She is the boss of her company and brand. However, if she signs a contract that says that the concert must start and end at a certain time, she has to meet the requirements of the agreement. If she decides after the contract is signed that she no longer wants to do the concert, she run the risk of a lawsuit being filed against her for breaching the agreement.
I'll use another example, when I was in college, I was signed to a modeling agency. If the client doesn't want you smiling in the photos, guess what ... even though I was a 1099 contracted model, I did not have the creative freedom to smile anyway. I had to follow the instructions of the client.
My Personal Conclusion: So when we are working our beloved promo events, our agreement has wording that allows for such arrangements to be expected. This doesn't make you any less of a contractor, nor does it automatically make you an employee. For example, employees are given shifts that they cannot simply reject without violating scheduling policies or having to go through the proper channels to get those shifts off. Whereas, a contractor can reject shifts they don't want without any penalties.
I don't want agencies misclassifying me for profits!
This accusation, generally speaking, is suspecting that companies are purposely misclassifying workers, and by promo workers complying with giving these companies an EIN instead of your social security number helps them to exploit workers.
Here are my rebuttals to consider:
Misclassification isn't attached to whether or not you're using an EIN or not. Misclassification is when the government concludes (via the 6 factors) the nature of the situation. But keep in mind that some small businesses are exempt from certain laws depending on the state they're incorporated in. Also, keep in mind that companies that have less than 51 employees are exempt from even more laws. Also, keep in mind that depending on the industry, a company of 500 employees can still be considered a small business due to the industry they are in. For instance, certain regulations of the Family and Medical Leave Act (FMLA) do not apply to businesses with fewer than 50 employees.
My Personal Conclusion: If you are basing your theory of misclassification off of not being able to complete promo events how you see fit as a contractor.. slow down and go back and review the 6 factors that the IRS uses to determine misclassification. Do more research. Read the full manual.
MORE SOURCES:
https://www.dol.gov/sites/dolgov/files/WHD/legacy/files/employerguide.pdf (specially Chapter 2, page 18)
I say all of this to say, that everything isn't cut dry across the board for all agencies.
Freelancers vs. Independent Contractors
Many promo workers want to be treated as freelancers when contracted for promo gigs. And, in my opinion (of which I could be wrong), that is where the confusion lies.
If you understand that country music and jazz music are both still forms of music, just different genres of music...
If you can understand that the democratic party and the republican party are both political parties, just different perspectives of politics...
If you can understand that a team lead and an event manager are both positions of leadership, just different responsibilities of leadership...
Then I would like to conclude that you can understand that although a freelancer and a contractor are both 1099 self-employed, they do not function the same. There are differences.
Freelancers are usually used for short-term projects.
Contractors are generally used for ongoing or long-term projects.
Freelancers usually have multiple direct clients at the same time.
Contractors usually execute agreements as a third party.
Freelancers set their own hours and meet deadlines.
Contractors are booked for a set time/date(s).
According to Indeed.com's blog Freelancer vs. Independent Contractor: What's the Difference?
"A freelance worker is a nonpermanent, self-employed worker ... An independent contractor is a temporary employee"
According to Upwork.com's blog Freelance vs. Contract Work: Basics and Differences
"Freelancers are independent professionals who provide their services to individual clients ... Companies hire independent contractors to do a specific job over a set period."
My Personal Conclusion: Freelancers help to fill solo or limited skillset gaps a company may have which leads them to contract freelancers such as an accountant, graphic designers, or plumbers. Freelancers have a small focus to handle on a bigger project. Whereas, contractors are generally used to assume a complete position for a set period of time in which a full skillset is needed to execute the agreement making contractors more position-based. Contractors are generally position-based such as a wedding planner, construction manager, event managers or (in our case) promo workers.
Why I Chose To Get An EIN
I got my EIN because I wanted to protect my social security number. We sign up with so many promo agencies and their staff changes throughout the year, I didn't want to depend solely on the protocols that promo agencies put in place to protect my personal information.
Once you're done using your EIN, you can have it canceled. You can't have your social security number canceled.
It is an easier process to report fraud if your EIN is misused vs if your social security number is compromised.
I like the perks of being able to open accounts with my EIN vs those accounts being tied to my social security number.
As a contractor, you have to make decisions based off your personal situation and the laws applicable to you. Do your research. Be informed.
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