In this episode I will discuss some key factors you must consider before classifying a worker as an independent contractor or 1099 worker.
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Transcript
EPISODE 4: CAN I CLASSIFY WORKERS AS CONTRACTORS?
Small Business Spoonfuls is a twice a week Q&A with Lisa Smith providing the answers to questions you have about running your small business. Hello, hello, Lisa Smith here. Welcome to Episode #4 of Small Business Spoonfuls. I am excited to be talking to you today about classifying your independent contractors. Oh my goodness.
This question came out to me and I thought what a hot topic. You have a worker. Are they an employee and they need to go on payroll and you need to pay all of your employment taxes or wouldn t it just be much easier to put them on a 1099 program and let them pay their own taxes at the end of the year? I mean, after all what s the big deal? As long as taxes are being paid, shouldn t everybody be happy? Well, that seems to be the conversation that goes on and has been going on for years.
What about this one? We are kind of a smallish business but we are approaching that 50 employee mark and once we hit 50 and go over, we are going to have to start abiding by all the rules associated with the Affordable Care Act. That s another big one, too. We are kind of wrapping a couple of questions together here today and answering it in various different ways. The bottom line is if you want to classify your worker appropriately, which we all do, then you have to make sure that they truly qualify to be a contractor before you put them out into contractor status.
For those of you who are members with the authority program at beauditsecure.com, you know that we publish information on this and we have video trainings and so forth out on this. For you guys if you haven t seen any of that yet, go over and log into your account and take a look around. We also have this really great eLearning course right now that we are selling to next to nothing. I think it is $37.97. It is ridiculously inexpensive. Normally, that course would go for about $200. Really, really good stuff. It s more of that lunch and learn type course. It s not going to be a little 5 minute video. It s really going to be a nice detail. We walk through in a good amount of detail in that course what it takes to have an independent contractor. Just for the sake of our short podcast today, let me give you a few key points to look at.
How do you know if you really have an independent contractor and you can really put somebody on a 1099?
1. Are they a well-known business around your area? Maybe they re incorporated, maybe they are not. Are they well-known? Do they have a lot of clients? Is this someone that you found online at their website and you called them up and said hey, I need you to do this contract service for me? If that s the case, you are probably very safe having 1. Are they a well-known business around your area? Maybe they re incorporated, maybe they are not. Are they well-known? Do they have a lot of clients? Is this someone that you found online at their website and you called them up and said hey, I need you to do this contract service for me? If that s the case, you are probably very safe having a 1099. It doesn t mean the auditor won t find a loophole somewhere, because there are a lot of pieces to this puzzle. Generally speaking, if they are a well-known business, then you are pretty safe.
2. The other thing, how about, do they have anything to lose? If they are a business, they are going to have something to lose, they are going to be invested in this. Let s say they are your lawn care service or the cleaning company that you use to bring in and do all your janitorial work. They have heavy equipment and they spend money on trucks and maybe they spend money on carpet cleaners and floor buffers and scrubbers and leaf blowers and weed eaters and all kinds of stuff like that. They are invested and if the equipment breaks, they have to fix it. Because they run a business. They are invested. The other thing is if you don t like the job they are doing for you, you can fire them. Just immediately fire them and there is none of this employment law suit stuff because they weren t your employee. They were an independent business assuming a risk in a competitive environment and for some reason you weren t happy with their work and you terminated the contract. Yeah, they have something to lose here so that is another one. Do they have a business location? I don t care if that location is a spare bedroom where the office is set up but if they are doing business out of your location, then that could be something to take a look at. Do you supply them with any of their equipment or their helpers? If you do, you may just have an employee that you are putting in a supervisory position. If they bring all of their own helpers, then yeah, definitely they are on that list to be a truly independent business that you are contracting with. Have you signed a contract? Are you really and truly in a business to business arrangement with them? That is something else to think about. There are lots of good things. We could go on and on. As a matter of fact, there are 20 maybe 30-40 factors if you add them all up that would really go into strongly vetting do I have an employee or do I have an independent contractor. You will have to run through that.
There is this list out there called the ABC list and a bunch of states got together and created that. There is another checklist called the 20 factor test that the IRS came up with years ago. It is technically not in use anymore, but it is still very valuable in developing your own checklist. If you are a member over at beauditsecure.com with our help desk or audit secure authority membership, then you definitely have access to those checklists that we already have made. We have already done the homework for you. We have a whole independent contractor compliance section that you can go into and look around and use our forms, our documents, our checklists to make sure you are doing it right. We walk you through that.
Get out there and figure this stuff out. Your auditors have been put on notice by not only federal government officials but state, that this is a hot topic and this is heavily fined. As a matter of fact, a couple of states have even worked towards making this a criminal offense if the offenses are egregious and numerous enough. One of the hardest hitting industries is the construction industry or any sort of a service related type industry, so construction, landscapers, cleaning companies. That s why I use them as my example because they are very hard hit. Also, IT is hard hit and so is hospitality with catering folks. Many times in construction and hospitality and a lot of industries, those one shot deal people are used. If you are using those one shot deal workers where they may come in just for this project and you may pay them $300 and you never see them again and you may think that was contract labor, it really was not under the law. The law actually says that if someone works for you more than 0 hours in one day, they should be on payroll unless they pass the test.
Now there are industries out there that have been sort of given this free ride by the IRS for several years. I ll give you some examples. There isn t a list anywhere but I ll give you some examples. Umpires that call games for school systems and they are part of that certified or registered umpire associate. They get thrown into a pool and schools come in and pull from the pool of umpires. They get 1099s. You don t have to worry about putting them on payroll but if you just have Joe who learned how to be an umpire on his own or you trained him through your school system and he works every game and calls every sport, then maybe that is an employee. You just have to look at each situation. Another independent contractor that has been sort of given a pass is off duty police officers. They very often do security gigs because they are peace officers.
If they are not working for your police department, they can do some security work on the side and they are always given 1099 for that and the IRS doesn t worry about it. They don t have to be running a big security business or anything like that. You can 1099 them. At least that s the way it is now. There are a few folks like that. How about this one? Licensed real estate agents. They are a real estate agent holding a license working through a brokerage. The brokerage gives them a place to sit, a desk, maybe even a computer at the brokerage. They buy the signs that you put out in the front yard that has the name of the brokerage on them. They may even buy the business cards for the real estate agent that has their name on them and the name of the brokerage. This real estate agent is really working for this brokerage in a way as you can see it. Not really supplying a lot of their own goods. Not really supplying their own office technically. They may have a home office, too, but the public front office is at the brokerage. How in the world are they independent contractors? Well, they get a pass.
They are considered statutory non employees and they are given a 1099. Technically the term for them is not independent contractor, they are statutory non employees but it still results in the same thing, a 1099. The IRS does all kinds of funny little things like this if an industry has a long history, maybe 30 or more years of doing it this way, then the IRS has been really good in keeping it that way. Don t get your hopes up, because they could come in at any time and switch it up on you because they do make the rules. Do your homework, look at the kind of worker you have. I know a lot of you, especially a little bit larger businesses, you have folks who retire, executives, maybe who retires and then they come back as that part time consultant. They might work 2-3 days a week in the office doing some job that is not at the level they did before but consulting with the organization is the way it is termed. They are put on 1099 status. They are not 1099ers, they are part time employees at that point. A lot of people are doing that wrong. I come across that every single time I teach a class. Yeah, vet yourself for that as well. That is just the tip of the iceberg.
Like I said, get out there, make sure you are doing your homework create a checklist. If you don t have one, stop by beauditsecure.com and sign up for our free content library. You never know what we might pop into that library. Right now, there may or may not be a checklist in there. I just don t know, because we change it up a lot. We keep the content as fresh as possible. Drop in, say hi to us, and see what is going on over there. We would love to have you.
HR Superstar
Alright, before we wrap up, we are going to get into our regular feature, HR Superstar. Okay, HR Superstar comes at you today courtesy of The Big Bang Theory. Don t we just love that TV show? Most people do, not everybody, but I think it s hysterical. All these folks, you know, all work at this university. Penny has worked at the Cheesecake Factory and now she has a job on the most recent episodes as a pharmaceutical rep. Penny and the pharmaceutical system. I m giving her some props on this episode. Nothing is 100% on TV but when they do it right, you like to call it out and point it out. There was an episode awhile back where Penny had one of her clients, a doctor that she called on with her pharmaceuticals. The doctor just fell madly in love with her apparently and Penny didn t even realize. Suddenly it turns up and the doctor is making all these advances.
He is madly in love. She shuts him down. She tells him it s inappropriate. Maybe she s even going to have to stop calling on him. They have a conversation about it. At first he doesn t accept it but she puts her foot down. She stands her ground and then he backs off. I thought that was good because she was doing the right thing. As a worker especially someone who is somewhat independent. She is an outside sales rep. Sales reps have a lot of loosey goosey kind of abilities that people that work 9-5 don t have. They are out there schmoozing, and even flirting sometimes. People tend to kind of look the other way in those situations. She did the right thing. She put her foot down at the risk of losing a client. Good going Big Bang Theory. That was the right thing to do in that situation. So yay. There you go, there is your HR Superstar for today. I am going to get on out of here now. I will see you in episode #5. Until then, I am Lisa Smith. I m out.
The post Episode 4: DOL Audit Alert: Independent Contractor Misclassification appeared first on Be Audit Secure.
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