U.S. Department of Labor Takes on Questionable Independent Contracting Practices

The traditional risk of using independent contractors, a/k/a "1099's," is an audit by the IRS or state taxing authorities. In recent years, state auditors have been more aggressive than the IRS because of manpower limitations at the IRS. This may change in the future because of better IRS funding. Either way, a tax audit will generally focus on the failure to withhold payroll taxes of the contractors, on the ground that the contractors should have been classified as employees.

In addition to the tax risk when using IC's, there is overtime pay risk, because contractors are typically paid straight time for all hours worked (the exception to this risk is "computer professions," who are exempt from hourly overtime). The overtime risk usually surfaces in the form of a civil lawsuit or arbitration claim for overtime pay under the Fair Labor Standards Act or a state law variant.