A Word of Caution
Many J-1 related recruitment or placement companies (or "agencies") try to sell the J-1 program as a way to save taxes. Try asking an agency you are considering working with if you should hire J-1’s as a W-2 or 1099. If they respond by telling you to do whatever saves the most on taxes, you might want to rethink that partnership.
There are many benefits to hosting J-1 participants. While there may also be tax upsides to having J-1 participants, be wary of such advertisements. These companies are trying to sell you something. Remember though, that your organization will be left with the fallout if you classify your J-1’s incorrectly.
As always, make sure to consult with a tax professional or legal consul for your specific situation.
W-2 or 1099 Evaluation
Interns and Trainees must receive direction as part of a structured training program. The DS-7002 document exists for the purpose of outlining what and how the participant will spend their time at your company.
From the IRS: "A worker is an employee when the business has the right to direct and control the worker. The business does not have to actually direct or control the way the work is done – as long as the employer has the right to direct and control the work." (Source)
The Trainee and Intern programs are specifically for structured training which is reinforced by the DS-7002 Document. This is a government contract stating you will provide ongoing training to the participant during their program.
From the IRS: "If the business provides the worker with training on how to do the job….This is strong evidence that the worker is an employee. Periodic or on-going training about procedures and methods is even stronger evidence of an employer-employee relationship. However, independent contractors ordinarily use their own methods." (Source)
Part of the requirements of a Trainee or Internship program are that the participant be evaluated during their time at your company. This is also in the DS-7002 agreement.
From the IRS: "If an evaluation system measures the details of how the work is performed, then these factors would point to an employee."
Not all trainee and internship programs are paid. If the program you offer is required to be paid, it must be paid minimum wage. This payment would be considered a wage or salary.
From the IRS: "An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time. This usually indicates that a worker is an employee, even when the wage or salary is supplemented by a commission. An independent contractor is usually paid by a flat fee for the job." (Source)
3. Type of Relationship
It is important to keep in mind that simply calling something an internship, or calling someone an "employee" does not make it so. The day-to-day actions, direction, etc., are what is taken into account.
Treating Interns and Trainees well is better for the long-term reputation of your brand and for referrals to future participants. While you could simply remove benefits from internship programs, this may not be the best choice just to try to save a few dollars on taxes.
From the IRS: "Employee benefits include things like insurance, pension plans, paid vacation, sick days, and disability insurance. Businesses generally do not grant these benefits to independent contractors. However, the lack of these types of benefits does not necessarily mean the worker is an independent contractor." (Source)
What if you miss-classify your J-1 participant?
The participant can file a document to the IRS, claiming your company miss-classified them. The IRS states that "If you classify an employee as an independent contractor and you have no reasonable basis for doing so, you may be held liable for employment taxes for that worker…" (Source)