Internal Revenue Service Warns: Designate Between Subs, Employees

Internal Revenue Service Warns: Designate Between Subs, Employees

It's easy for kitchen and bath specialists to get the lines blurred between their own employees and independent contractors especially with installers, plumbers, electricians and other subcontractors.

It can also potentially be very expensive.

In reality, business owners don't really get to decide whether or not a person on a job site is an employee; the Internal Revenue Service makes that decision for them.

The following is a list of 20 questions the IRS uses to determine if a worker is an independent contractor or an employee. The answer of "yes" to any one of these questions (except #16) may mean the worker is a company employee. 

1. Is the worker required to comply with instructions about when, where and how the work is done? 
2. Is the worker provided training that would enable him/her to perform a job in a particular method or manner? 
3. Are the services provided by the worker an integral part of the business' operations? 
4. Must the services be rendered personally? 
5. Does the business hire, supervise or pay assistants to help the worker on the job? 
6. Is there a continuing relationship between the worker and the person for whom the services are performed?
7. Does the recipient of the services set the work schedule? 
8. Is the worker required to devote his/her full time to the person he/she performs services for? 
9. Is the work performed at the place of business of the company or at specific places set by the firm? 
10. Does the recipient of the services direct the sequence in which the work must be done? 
11. Are regular oral or written reports required to be submitted by the worker? 
12. Is payment made hourly, weekly or monthly (as opposed to by commission or by the job?) 
13. Are business and/or traveling expenses reimbursed? 
14. Does the company furnish tools and materials used by the worker? 
15. Has the worker failed to invest in equipment or facilities used to provide the services? 
16. Does the arrangement put the person in a position of realizing either a profit or loss on the work? 
17. Does the worker perform services exclusively for the company rather than working for a number of companies at the same time? 
18. Does the worker in fact make his/her services regularly available to the general public? 
19. Is the worker subject to dismissal for reasons other than non-performance of the contract specifications? 
20. Can the worker terminate his/her relationship without incurring a liability for failure to complete the job? 

The consequences of being caught and having an independent contractor reclassified as an employee can be very expensive. If caught, the employer becomes responsible for both the employer's and employees' FICA (15.3% of gross wages) and FUTA (currently $56 per year per employee), as well as the federal income tax (20% of gross wages). 

The IRS may also bring in the state and, as a result, the employer may also become liable for the state income tax, as well as state unemployment and worker's compensation. Employers may also face a penalty equal to the amount of the back taxes owed. Likewise, the employer will owe interest on all back taxes from the due dates. 

And, if the contractor is determined to be an employee because a dispute over workman's compensation or a job site injury brings it to the IRS' attention, the business may be required to support the injured person for the rest of his or her life. 

To qualify a person as an independent contractor under Section 503 of the 1978 Revenue Act, the following three requirements must be met: 

  • You must file 1099 miscellaneous income forms (if you pay them over $600). 

  • Similar workers must be treated alike (not treated as employees).

  • There must be a good reason for the contractor status. 

According to the IRS, workers are employees if they must comply with the employer's instructions about their work, receive training or direction from the employer, or provide services that integrate into the employer's business. They are employees if they render their services personally (can't subcontract), have a continuing working relationship with the employer, must follow set hours of work, work full time for the employer, and perform the work at your job site.

They are also considered employees if they regularly report to you; if they are paid regularly (weekly, for example); if they are paid for business expenses; if they use your tools and/or materials; if they lack a major investment of their own in facilities used to perform services; if they cannot make a profit or suffer a loss from their services; if they work only for you; if they do not offer their services independently to the public; if they can be fired by you, and if they can quit work and not incur a liability. 

To qualify as an independent contractor, the opposite of all of these would be true. But remember, the IRS selects the questions and grades the answers.

If a question arises as to whether or not a person is an independent contractor or employee, the following may help convince the IRS that the person is truly an independent contractor. 

  • The business should have the person sign a written agreement attesting to the fact that he/she is an independent contractor. 

  • The person should actually bill the business for the services rendered. 

  • The person should be required to have his or her own worker's compensation coverage. 

  • As much independence as possible should be given in areas such as hours worked, where the job is to be performed, and the like. 

  • The person should provide his or her own tools, should supply training, and should provide transportation to and from the job site. 

The ultimate safeguard for a business is to complete a Form SS-8 that asks the IRS for a determination if the person is an employee. For more information, go to http://www.irs.gov/, where you can download IRS Publication 937 for free.

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