QUESTION
I want to hire a mortgage loan officer. I’ve been told it may be to my benefit to classify the loan officer as a 1099 independent contractor versus a W-2 employee. Am I able to do that? What are the benefits?
ANSWER
I am answering this question strictly from the human resources point of view. As the subject more broadly relates to whether a loan officer - based on being an 1099 independent contractor or a W-2 employee - meets specific guidelines set forth by the Fair Labor Standards Act and the issuances of the Department of Labor with respect to classifying mortgage loan originators or the GSEs, various federal agencies, and Department of Housing and Urban Development guidelines for the purposes of originating certain types of loan products, such as FHA loans, I suggest you contact us for a consultation or speak to your compliance department for more details.
It may seem a benefit to the employer to classify a loan officer as a 1099 independent contractor because the employer does not pay employee benefits or certain payroll taxes. However, the question is not whether it is to the employer’s benefit, but rather, does the person’s position and work qualify as an independent contractor under IRS rules? The IRS has specific guidelines regarding whether a person can be classified as a contractor (1099). The IRS can levy significant penalties to employers who misclassify employees.
Generally, an employee with a W-2 is paid on an hourly or salaried basis, while a 1099 independent contractor is paid based on a contract that has a defined end, although the duration of employment can last anywhere from several weeks to years. Typically, a 1099 independent contractor is hired to work on a specific project or to provide support during a W-2 employee’s leave of absence.
The IRS guidelines basically say, “If you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees.” The IRS focuses on three main areas when determining employment status:
- How much control the employer has over the worker’s behavior and work results. (Who controls training, where and when the person works, what equipment they use?)
- How much control does the employer have on finances? (Does the employer have primary control over the person’s profit or loss?)
- What is the relationship between parties? (Does the worker receive benefits and is it a long-term relationship?)
Here is the 20-point checklist from the IRS, which may be used as guidelines in determining if a worker can be legally paid as a contractor:
- Must the individual take instructions from your management staff regarding when, where, and how work is to be done?
- Does the individual receive training from your company?
- Is the success or continuation of your business somewhat dependent on the type of service provided by the individual?
- Must the individual personally perform the contracted services?
- Have you hired, supervised, or paid individuals to assist the worker in completing the project stated in the contract?
- Is there a continuing relationship between your company and the individual?
- Must the individual work set hours?
- Is the individual required to work full time at your company?
- Is the work performed on company premises?
- Is the individual required to follow a set sequence or routine in the performance of his work?
- Must the individual give you reports regarding his/her work?
- Is the individual paid by the hour, week, or month?
- Do you reimburse the individual for business/travel expenses?
- Do you supply the individual with needed tools or materials?
- Have you made a significant investment in facilities used by the individual to perform services?
- Is the individual free from suffering a loss or realizing a profit based on his work?
- Does the individual only perform services for your company?
- Does the individual limit the availability of his services to the general public?
- Do you have the right to discharge the individual?
- May the individual terminate his services at any time?
No one question determines the worker’s status. Agencies and courts typically look at the totality of the employment circumstances when determining whether a worker qualifies as an independent contractor.
Kimberly Braman
Director/Human Resources Compliance
Lenders Compliance Group
