A lot of people were asking me about this topic this weekend at the Atlanta Pet Fair. I’ve posted this before but it’s such an important topic, I’m posting it again in my blog this week. If you are a business owner, this is an important topic when it comes to finding people to help you build your company.
I’m just like most of you. My first business was a mobile van. I was extremely successful. Within less than a year I needed a second van. I needed someone to run that unit. I didn’t want it complicated. I just needed help. I figured the easiest route to go was to find the person that could groom and send them out in a second rig. I didn’t need to file all that mumbo-jumbo with the government. Heck, this person was going to run solo — it was theperfect situation for an independent contractor. After all, everybody else was doing it!
Fast forward three years. I now had four rigs. I had hired an accountant. My accountant suggested I hire a CPA to do my taxes. Throughout the years I knew in my heart I was running close to the wire with my independent contractors. My father had been harping on me. My accountant was concerned. My new CPA really set me straight using a very effective tactic — fear.
If you work with independent contractors within your grooming organization, do you really know the current tax laws? The IRS is very strict with its rulings concerning employees vs. independent contractors. Being naïve is no excuse. If you are ever caught, it will be the IRS that makes the ruling on whether you actually have an employee or an independent contractor.
There are a number of different ways to get caught. It might be an audit of your business or one of your workers files an unemployment claim, a disgruntled worker simply turns you in are a few of the common ways but there are many more.
I know — I know. You can’t afford to hire employees. All those taxes you have to take out of the employee’s paycheck and all the taxes that you need to pay into the government both state and federal plus Social Security and Medicare for each employee. Whew – it’s a paperwork and budget nightmare.
But trust me, if you have your workers misclassified, you can’t afford not to have them as employees if that’s what they truly are. The IRS has no qualms about coming in, slapping you with heavy fines and penalties equal to the amount of all the back taxes owed plus all the interest on those back taxes. Plus, the IRS may turn you in to your state government as well. In one single sweep, your business and your livelihood can be destroyed.
Shortly after I switched from independent contractors to employees I started hearing real life horror stories from within our own industry. One of my personal idols virtually lost everything due to incorrectly filing with the IRS. They lost their business, their home, their personal relationship — everything. They confirmed the fear that placed into me by my CPA years before. The IRS will – and can – destroy your life if you do not play by their rules. The stories that were shared much later only reaffirmed I had made the right decision years before.
So here’s the scoop. The laws are complex, subjective, and inconsistently applied, but knowing the rules can keep you and your workers safe. So here they are, in a nutshell: Under United States common law, a worker is an employee if the person for whom he or she works has the right to direct and control the way he or she works, both as to the final result and as to the details of when, where, how, and in which sequence the work is to be done. It is the IRS’ view that the employer need not actually exercise control. It is sufficient that it has the right to do so.
Here’s a list of 20 questions the IRS uses to determine if a worker is an independent contractor or an employee. A ‘yes’ answer to any of the questions except #16 may indicate your worker is truly an employee. Take a look. Be honest with yourself — you can’t afford not to. (and yes did raise my grooming prices!)
IRS 20 Questions: Independent Contractor OR Employee
- Is the worker required to comply with instructions about when, where and how the work is done?
- Is the worker provided training that would enable him/her to perform a job in a particular method or manner?
- Are the services provided by the worker an integral part of the business’ operations?
- Must the services be rendered personally?
- Does the business hire, supervise, or pay assistants to help the worker on the job?
- Is there a continuing relationship between the worker and the person for whom the services are performed?
- Does the recipient of the services set the work schedule?
- Is the worker required to devote his/her full time to the person he/she performs services for?
- Is the work performed at the place of business of the company or at specific places set by the company?
- Does the recipient of the services direct the sequence in which the work must be done?
- Are regular oral or written reports required to be submitted by the worker?
- Is the method of payment hourly, weekly, monthly (as opposed to commission or by the job?)
- Are business and/or traveling expenses reimbursed?
- Does the company furnish tools and materials used by the worker?
- Has the worker failed to invest in equipment or facilities used to provide the services?
- Does the arrangement put the person in a position or realizing either a profit or loss on the work?
- Does the worker perform services exclusively for the company rather than working for a number of companies at the same time?
- Does the worker in fact make his/her services regularly available to the general public?
- Is the worker subject to dismissal for reasons other than non-performance of the contract specifications?
- Can the worker terminate his/her relationship without incurring a liability for failure to complete the job?