1099 Tax Forms and Worker Misclassifications in the Staffing Industry

Jeremy Bilsky

Last time updated: December 17, 2024

Close up of documents with calculator, pen, and glasses on top

Tax season is here again, which means it’s time to start thinking about tax forms and employee classifications. With the IRS cracking down on small businesses and increasing consequences for incorrect tax return filing, it is more important than ever that you understand the dos and don’ts so you don’t end up paying harsh penalties (or worse).
In this blog post, we’re offering advice to help you properly file tax forms and avoid misclassifications this tax season.

Do Staffing Agencies Receive 1099s?

The Internal Revenue Service (IRS) employment laws require every staffing agency to issue Form 1099-MISC when payments made in a given tax year meet or exceed $600.

Depending on the services performed or offered, staffing and recruitment agencies can provide temporary, contract, temp-to-hire, contract-to-hire, or direct employment. Temporary, contractor, temp-to-hire, and contract-to-hire are all services that fall under a 1099 tax classification. The only caveat is if your recruitment agency meets the corporation exemption.

Employees vs. independent contractors

When you are classifying a worker, you can either categorize them as a W-2 (employee) or 1099 (independent contractor). This distinction is important because you are required to pay payroll taxes on wages paid to employees, while payroll taxes, withholdings and workers’ workers’ compensation are generally not required for independent contractors. The problem is that, when it comes to determining who qualifies for a 1099 classification, the IRS has general guidelines which can be a bit unclear. It’s important that employees actually qualify for that classification because consequences for filing incorrectly are severe.

The risks of misclassification

If a worker is classified as a 1099, there can be issues if they are let go and file for unemployment. You could be opened up to paying back taxes if you didn’t properly classify your employees the first time, and the IRS is really cracking down. In reality, most temporary workers should be classified as W-2s because they are not skilled workers who could use a 1099 like nurses or other professionals, and it’s best to err on the side of caution.

The takeaway

As a staffing firm, you need to do your due diligence to make sure your workers are truly qualified professionals if you are classifying them as independent contractors. Otherwise, you will likely be forced to pay steep penalties from the IRS, and could even face criminal punishments.

If you need help determining your income tax classifications, contact a member of our Back Office Operations team. We have an in-house tax department that is fully equipped to handle the burden of payroll tax support solutions, services, and administration, so you can focus on growing your staffing firm.