Forcing a contractor to go W2

I have had a few questions like this: “I was wondering if there is a reason the vendor/broker/head hunter forces a contractor to go on W2?  As per many vendors, lots of big banks are insisting that contractors should be on vendors W2 and NOT have a sub-contracting relationship through an s-corp or 1099.”  To see the difference between W2 and 1099, check out Consultants: 1099 or W-2?.

So I asked my recruiter friend, and his reply:

I just landed a client a few months ago and per their MSA (Master Service Agreement), any candidate that I put on contract with them MUST be a W2’d employee of my staffing company.  It basically comes down to showing that the vendor (my staffing company) has control over the employee and that there aren’t a bunch of layers between the vendor and other sub-contractors.  By eliminating the potential for multiple sub-contracting layers it does two things: (1) reduces the margin between what the contractor “actually” costs and what that person is being billed to the client and (2) it shows that the vendor has control over the contractor (meaning that the vendor has a direct relationship with the candidate and the vendor isn’t getting the person from a sub of a sub of a sub).  I’m sure relative to the “banking” scenario listed in your question, there are also some federal regulations that have to be followed since dollars are involved in that industry.  It mostly comes down to ownership/accountability.  How well do you know a candidate if they come from a sub of a sub of a sub?  It is better for everyone involved there is a “direct” relationship between the vendor and their employee.

About James Serra

James is SQL Server MVP and a independent consultant with the title of Business Intelligence/Data Warehouse/Master Data Management Architect and Developer, specializing in the Microsoft SQL Server BI stack.
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One Response to Forcing a contractor to go W2

  1. dave wentzel says:

    I don’t think your recruiter friend understands the IRS rules very well. In many cases more layers of middlemen are better for everyone. You can google around but there are various “tests” that determine if a worker is an independent contractor or an employee in the eyes of the IRS. Here is one pub: http://www.irs.gov/pub/irs-utl/emporind.pdf. Many businesses are insisting on their contractors being W-2′d via the recruiting firm because there is clearly less cause for worker reclassification if the worker is already getting a paycheck. The issue is that the IRS wants its employer portion of FICA any way it can get it. The business (contractee) doesn’t want another employee because FICA ain’t cheap. An independent contractor is *supposed* to pay his/her employer portion of FICA. Independent contractors have lots of “tricks” to ensure they pay as little FICA as possible, and I’m not going to enumerate them. they are legal. Unfortunately some contractors don’t pay themselves a “reasonable” salary, ie no FICA, which puts the contractor and the contractee under a potential spotlight. If you were the IRS trying to get your FICA, would you go after the contractor or the contractee? The contractee has the deeper pockets and the IRS can try to reclassify more workers in one fell swoop.

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