It’s tax time, and you’re probably reviewing last year’s performance and thinking how to improve financials in an uncertain climate. Will there be a recession or a “soft landing?” Will consumer spending increase, or will people tighten their belts? Will food prices continue to increase or level?

One of the few things you can control is staffing costs. You may be considering 1099 workers for peak periods rather than permanent W-2 employees. But hiring temporary workers through a staffing agency may be even better. We were surprised to hear from owners at last year’s annual restaurant show in Chicago that many think about it but aren’t sure what to do. Here are the ins and outs of staffing choices.

What’s the difference between 1099 and W-2 employees?

Let’s talk CPA terms for a moment. Staff hired for a specific, limited role with set start and end dates are the classic example of 1099, temporary employees. They are independent contractors responsible for their own payroll taxes. They don’t receive benefits, workers’ compensation, or unemployment insurance. The employer provides them a Form 1099 at year-end (provided the IC was paid $600 or more in the year).

Persons hired for an ongoing job where the employer determines their hours and working arrangements are the prime example of W-2 employees. The employer withholds taxes for them, pays the employer’s share of payroll taxes, and provides workers’ compensation and unemployment insurance (if the employer meets certain criteria). Depending on the business, the employer may even offer vacation and various benefits. At year-end, the employer provides these employees a Form W-2.

What if the status isn’t clear?

The situation gets murkier when a worker doesn’t easily fall into one of these categories. The IRS sets three Common Law Rules for evaluating a worker’s status:

  1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
  2. Financial: Are the business aspects of the worker’s job controlled by the payer? (These include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
  3. Type of Relationship: Are there written contracts or employee-type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

The IRS states there’s no “magic number” of criteria and no single factor to determine whether a worker is an IC or an employee. Instead, they counsel employers to “look at the entire relationship and consider the extent of the right to direct and control the worker.”

Risks of misclassifying employees

A recent article demonstrated the risk of not communicating employment status to a staff member. It can be tempting to hire workers as ICs to avoid the long-term commitment and expense of W-2 employees, but if they don’t meet the criteria for ICs, you could be making a costly mistake. Employers who misclassify employees as 1099 ICs can be assessed a penalty equal to the taxes that should have been withheld along with possible additional fines and interest. In addition, employers can be held liable if a worker misclassified as a 1099 IC gets injured in the workplace.

A better solution

Hospitality business owners know staffing needs can be hard to predict, and sometimes you have to make decisions quickly to meet peak-period demands. Rather than risk the pitfalls of hiring ICs and doing 1099s on your own, many owners are turning to experienced staffing agencies to fill their labor gaps. In most cases, the workers are classified as W-2 employees of the staffing agency which is responsible for:

  • Workers compensation insurance 
  • Unemployment insurance 
  • Employee benefits 
  • Management of payroll taxes 

Choosing the right staffing partner

If you like the sound of getting high-quality staff on short notice, without the headaches and risks of hiring 1099 ICs, consider a staffing partner. But make sure that partner has experience in the hospitality industry and the knowledge to properly classify its workers. A great staffing team can help you navigate during these uncertain times to ensure your customers get the service they deserve.

George Lessmeister is CEO and founder of LGC Hospitality, a national staffing firm headquartered in Indianapolis. LGC has offices in over 40 U.S. cities.

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