Front Rail

PENNY WISE AND DOLLAR FOOLISH

BY PETE MADLAND, TLW EXECUTIVE DIRECTOR

We are all interested in saving money when and where we can. Labor costs can be a killer, for example, but it is important to be smart as to how you save on your labor expenses.

There are a couple of practices owners use that I do not recommend. The first, and most popular, is paying cash. Too many owners think they are saving money paying cash and, of course, employees like it. Sure, you save by not paying unemployment, Social Security and Medicare, but how much are you really saving? Check with your accountant; you may be surprised. Is that amount worth the risk of getting audited?

When the Department of Revenue sees sales of $500,000 and labor costs of only $30,000 on a tax return, a red flag is raised. Too many of you know the pain and cost of an audit. If someone gets hurt on the job, but is not on the payroll, guess what? No workers’ compensation insurance. How much money are you saving now? You would be surprised how many employees called the office during the recent crisis. The question was the same: “I got paid cash. Do I get unemployment?” You know the answer.

Another method of saving on labor is to have contract employees rather than employees. This is appealing because there’s no withholding state and federal income taxes, no paying Social Security or Medicare, and no dealing with unemployment taxes or workers’ compensation.

But there are legal consequences. According to the Department of Workforce Development, “Under the law, workers are presumed to be employees and subject to tax, unless determined by law to be independent contractors. An employer found to be utilizing misclassified workers may be liable for additional tax, interest and penalties.”

It is difficult to have a person perform work on a regular or semiregular basis, and not be an employee. If you’re doing it to escape paying taxes, be careful. Check out the checklist below. It can help you determine if your contract employee is truly an independent contractor or an employee. Read through it carefully and be honest with yourself.

20 POINTS FOR CLASSIFYING AN EMPLOYEE VS. AN INDEPENDENT CONTRACTOR

There are 20 factors used by the Internal Revenue Service (IRS) to determine whether you have enough control over a worker to be an employer. Though these rules are intended only as a guide (the IRS says the importance of each factor depends on individual circumstances), they should be helpful in determining whether you wield enough control to show an employer-employee relationship.

If you answer “yes” to all of the first four questions, you’re probably dealing with an independent contractor, whereas answering “yes” to any of questions five through 20 means your worker is probably an employee.

1. Can the worker make a profit or suffer a loss as a result of the work, aside from the money earned from the project? 2. Does the worker have an investment in the equipment and facilities used to do the work? 3. Does the person work for more than one company at a time? (This tends to indicate independent contractor status, but isn’t conclusive since employees can also work for more than one employer.) 4. Does the worker offer services to the general public? 5. Do you have the right to give the worker instructions about when, where and how to work? 6. Do you train the worker to do the job in a particular way? 7. Are the worker’s services so important to your business that they become a necessary part of the business? 8. Must the worker provide the services personally, as opposed to delegating tasks to someone else? 9. Do you hire, supervise and pay the worker’s assistants? 10. Is there an ongoing relationship between the worker and yourself? 11. Do you set the worker’s hours? 12. Must the worker spend all of his or her time on your job? 13. Must the individual work on your premises, or do you control the route or location where the work must be performed? 14. Do you have the right to determine the order in which services are performed? 15. Must the worker give you reports accounting for his or her actions? 16. Do you pay the worker by the hour, week or month? 17. Do you pay the worker’s business or travel costs? 18. Do you provide the worker with equipment, tools or materials? 19. Can you fire the worker? 20. Can the worker quit at any time, without incurring liability?

Mistakenly classifying an employee as an independent contractor can result in significant fines and penalties. Don’t be penny wise and a dollar foolish. TLW