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Comment by crdoconnor | Hacker News Reader

Many companies hire contractors and then turn them into permanent employees.

I'm a startup founder and while this had been our initial approach to evaluating new engineers, our payroll company, PayChex, has specifically advised us to NOT do this. Why? Because it sends a red flag to the IRS to come after us for taxes for the period when they were a contractor.

Crazily enough PayChex has told us that the real solution here is for us to "sign" the person over to a contracting company so we can hire them thru the contracting company for the evaluation period. Yes we'll pay more for them since we have to pay that company's markup but we won't get gone after by the IRS. And, yes, it adds another layer of BS / paperwork. End result? We've hired no one because of this - its too hard to vet engineers without seeing their work. Sigh.

IANAA && IANAL but maybe you shouldn't take your payroll company's word for this. I would guess if you meet your tax obligations and employment law obligations you should be ok. Maybe get a second (and third) opinion??

> I would guess if you meet your tax obligations and employment law obligations you should be ok.

If its an audit red flag, that's a risk even if you aren't breaking the tax rules associated with that transaction -- it increases the risk associated with any tax rules you might, knowingly or not, be breaking.

Further, if you are using it to vet potential permanent employees in working conditions as much like the ones they will be working in as employees as possible, its quite likely you aren't meeting your employment law obligations when you designate them as contractors (and, because tax treatment is tied to that designation, quite likely as a result not meeting your tax law obligations.)

Certainly, the best advice is a domain expert working for you in that capacity, that knows exactly what you are planning, rather than your payroll company speaking in generalities, but in generalities the advice given doesn't seem all that bad.

What you say makes perfect sense, but in that context how do "contract to hire" places do what they do legally?

One common mechanism is the use of third-party staffing agencies who are regular employers of the staffers for the contract period the way the payroll company upthread recommended.

Direct contract-to-hire is also done, but its fairly frequently not done legally, which is why it gets additional scrutiny.

I really wouldn't not hire because of the chance of being audited, that seems like a pretty disproportionate response. May add complications, but if you're that worried, you can always hire people full time on an explicit trial basis.

What's wrong with going back and paying the employer side taxes on the contracting period for those that convert?

So... pay more money now via contracting house markup to avoid maybe paying more later?

Yes, that's because companies that hire people as 1099 independent contractors also usually provide their equipment, train and direct them on how the work is to be performed, etc.

The litmus test for a 1099 is that "an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done."

Companies frequently fail this test when hiring people as 1099.

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employ...

> We've hired no one because of this - its too hard to vet engineers without seeing their work.

I really wish certain segments of this industry would stop being so irrationally paranoid about hiring. I think so many of our hiring and talent problems are self-inflicted.

You can hire someone ad a short term contract employee. Your payroll company was trllijgt you to not fraudulently hire people as "independent contractors".

While that sounds like a reasonable hiring approach most of the contractors I know (in the UK and Ireland) wouldn't take permanency because contractors earn significantly more. Maybe it's a bit different in the US though.

I was the same. There's an easy enough solution to that for the company, however.

I knew a few contractors who did take the full time role despite the lower pay.

It was different in the US before ACA (Obamacare) was implemented. Before then, employer subsidized healthcare was significantly cheaper than buying private insurance on the open market. That was a major impetus to taking a full time job. Now, the employer health plans are little better than what you can get through ACA, especially if you're young and healthy and can opt for the cheaper options with less coverage.

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