Worker classification (W-2 vs 1099)

Definition

Employee or contractor, decided by who controls the work, not the paperwork.

Why It Matters

Treating employees as contractors to avoid payroll taxes and workers' compensation is a liability that travels with the business, and back taxes with penalties can be assessed for years already gone. Any labor-heavy trade belongs in diligence for exactly this reason, painting, fencing, cleaning, moving, and home care most of all. Reclassifying after you buy also raises the real cost of the labor you priced, so the finding changes the model as well as the risk.

In numbers: A crew of 15 paid $45,000 each as 1099 subcontractors while working set hours under supervision is $675,000 a year of wages. Reclassified, the federal income and FICA tax owed, with IRC 3509 cutting the withholding and the employee's share, comes to about 10.7% of that, roughly $72,000 a year, or 13.7% where no 1099s were filed. Penalties, interest and state taxes come on top, and in a stock purchase the company you bought owes it all.