Independent Contractor Agreement

[Penrith]

How do most of you handle "employees"?

I have a start up lawn service company. I do not want to track the taxes of my employees. I'm thinking of getting an "Independent Contractor Agreement" of some type and giving them a 1099 at the end of the year.

Once I really get the company going, I'll begin working on taking out taxes out of payroll checks.

Just curious what others are doing. If some of you have some type of agreement for independent contractors, would you mind sharing?

Thanks for any info.

-James Oliver

[GrassMaster]

reply

Hello Penrith & Welcome to the Lawnservicing forum Community!<img src=icon_smile.gif border=0 align=middle>

I'm not to Found of the Independent Contractor Deal, there is to Many Ifs, ands & Buts!

I had an Employee, that his Parents got Caught up in the Independent Contractor Deal, They went from New His & Her Mercedes Benz, Also a $300,000 home to a 1 Bedroom Apartment & Wore out Company Truck in about 3 to 4 Months?

Here is a Bunch of Garbled Infomation I gathered & I haven't had Time to Put it Together Properly Yet, But I think you will get the Picture? If you can Stand it & Read it all, Please Re Read the Last Paragraph Several times?

Again I Oppologize for this Unfinished Work? The Last Paragraph is Most Important!

<b>Independent Contractor</b>

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Employee, Definition
Any worker who receives compensation for services is either an independent contractor or an employee. Any worker who performs services for another subject to the latters control both as to the result to be accomplished and the details and means by which that goal will be achieved is an employee. The actual direction or control of the activities of the one performing the services is not necessary; the important factor is that the employer has the legal right to control those activities, whether or not the right is exercised.

Classification of workers as independent contractors or as employees is not always a simple matter; federal and state regulations make use of four separate sets of rules and methodologies for making this determination.

Statute

Federal Income Tax (FIT) Treatment. Two classes of workers (direct sellers and licensed, qualified real estate agents) are specifically classified as independent contractors by the Internal Revenue Code. The status of other classes of workers is determined through application of the Common Law test discussed below.

Federal Insurance Contributions Act (FICA) Treatment. FICA specifically classifies five types of workers as employees: corporate officers, agent drivers or commission drivers who distribute food or beverages or handle laundry or dry cleaning, industrial home workers who receive at least $100 in a calendar year, full time life insurance salespeople, and full time traveling or city salespeople who solicit orders from retail merchants for later delivery. Others are classified through application of the Common Law test.

Federal Unemployment Tax Act (FUTA). FUTAs specified employees are corporate officers, agent drivers or commission drivers, and traveling or city salespeople. Others are classified through application of the Common Law test.

Safe Harbor Rules

The safe harbor rules provide some relief against the classification of a worker as an employee. A worker will not be deemed to be an employee (even if the Common Law test concludes otherwise) if:

(1) the employer never treated the worker (or other workers holding substantially similar positions) as an employee for employment tax purposes,

(2) the employer filed all employment tax and information returns consistent with the workers classification as a contractor, and

(3) a reasonable basis for treating the worker as a contractor exists.

Reasonable basis safe havens include:

(1) judicial precedent, published rulings, technical advice, and letter rulings,

(2) results of past IRS audit that did not classify workers holding substantially similar positions as employees, and

(3) longstanding and recognized industry practice.

Common Law Test

The IRS uses a twenty question Common Law test to assess the level of control that an employer exerts over a worker. The more control possessed by the employer (especially over the means of accomplishing a task rather than the end result), the more likely a worker is an employee. Control, in this instance, is defined as the level of legal right to direct rather than the level of direction actually provided.

ABC Test

Most states use a more stringent, three part test [ABC Test], to determine whether a worker is an employee.

As with any issue before the IRS and state regulatory agencies, special rules apply to all sorts of worker groups including, but not limited to, accountants, agricultural labor, attorneys, casual labor, corporate directors and officers, domestics, family members, insurance agents, military, ministers, partners, physicians and dentists, and students. Check the specific rules if you are using these types of workers.

If, after studying the regulations and applying the Common Law or ABC test, a workers status remains unclear, an employer may request a specific IRS determination by filing Form SS-8 (Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding) with the district director of his IRS service center. (See addresses under Form 1120; Form 7004.)

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Employee or Contractor?
Many companies these days are making use of contract labor in lieu of full-time (or even part-time) employees for a lot of good reasons: specific job skills may be required only for an identifiable project or for a short period of time; more personnel may be required to carry the company through a particularly busy period; the company may not be sufficiently financially secure to attract the talent it needs on an employer--employee basis but may be able to successfully "contract" labor for a specified period of time. Whatever the reason, the use of contract labor is common among companies of all types and sizes and its use is growing.

With the increase in usage of contract labor has come increased attention to the subject by the Internal Revenue Service and the various state employment departments. They are viewing the increased usage of contract labor with suspicion and fear that companies are using contract labor for a different, more subversive reason: to avoid the withholding and payment of payroll taxes. So be careful, one man's contract laborer is often another man's employee.

What difference does it make if I classify a worker as an independent contractor instead of as an employee?

Employee Withholding. Employers are responsible for the withholding and timely remittance of federal income taxes, state and local income taxes, and FICA taxes from wages paid to their employees.

Employer Payroll Taxes. Employers owe, and must remit, their own share of payroll taxes, such as FICA and federal and state unemployment insurance, on employee wages.

Labor Laws. Worker's compensation, working condition, and minimum wage laws all impose on employers certain financial and other requirements for the benefit of employees.

Employee Benefits. Employees generally enjoy employer funded benefit programs such as vacations, holidays with pay, health insurance, and pension and profit sharing plans; contractors generally do not receive these benefits.

Reporting. Wages paid to employees (along with the amounts of the various taxes withheld) are reported on Form W-2; amounts paid to contractors are reported on Form 1099. Additionally, Forms 940 and 941 (and perhaps others) must be filed for wages paid to employees.

And all of this is just for right now. Your friend, the General Accounting Office (GAO), thinks you should also withhold payroll taxes on payments to contractors to avoid underreporting of income by these untrustworthy individuals. The GAO also thinks the current $50 penalty for failure to file Forms 1099 should be boosted, that the current threshold of $600 for filing Forms 1099 should be lowered, that total payments to independent contractors during a year should be reported on your Form 1120, that incorporated independent contractors should be added to the list of those for whom Forms 1099 must be filed, and that contractors' tax identification numbers should be obtained and validated before you make any payments to those contractors.

OK, so it does make a difference. How can I determine whether a particular worker is an employee or an independent contractor?

Not only may one man's contract laborer be another man's employee -- one federal agency's contract laborer may be another agency's employee!

Federal Income Tax (FIT) Treatment. Two classes of workers (direct sellers and licensed, qualified real estate agents) are specifically classified as independent contractors by the Internal Revenue Code. The status of other classes of workers is determined through application of the Common Law test discussed below.

Federal Insurance Contributions Act (FICA) Treatment. FICA specifically classifies five types of workers as employees: corporate officers, agent drivers or commission drivers who distribute food or beverages or handle laundry or dry cleaning, industrial home workers who receive at least $100 in a calendar year, full time life insurance salespeople, and full time traveling or city salespeople who solicit orders from retail merchants for later delivery. Others are classified through application of the Common Law test.

Federal Unemployment Tax Act (FUTA) Treatment. FUTA's specified employees are corporate officers, agent drivers or commission drivers, and traveling or city salespeople. Others are classified through application of the Common Law test.

(Keep in mind that the classification of a worker as an employee or contractor through application of the above rules does not automatically mean that FIT, FICA, or FUTA is due and payable. Making those determinations requires analysis of the various definitions of taxable and exempt wages.)

Common Law Test. Applying the Common Law test to determine whether a worker is an employee or contractor basically consists of analyzing the level of control you, as an employer, exert over the worker. The more control you possess (especially over the means of accomplishing a task rather than the end result), the more likely a worker is an employee. Control, in this instance, is defined as the level of legal right to direct rather than the level of direction actually provided.

The IRS uses a twenty question test to assess the level of control ("yes" answers provide evidence of an employer--employee relationship):

(1) Is the worker required to follow the employers instructions in completing the job or accomplishing the task?

(2) Does the employer provide the training necessary for completion of the job?

(3) Are the workers specific personal services required for successful completion of the job?

(4) Are the workers services crucial to the success or continued existence of the company?

(5) Does the employer set work hours?

(6) Does the worker have a continuing relationship with the company?

(7) Does the employer hire, supervise, or pay any of the workers assistants?

(8) Is the worker precluded from seeking assignments with other companies or from refusing assignments offered by the employer?

(9) Does the employer specify the location where the work must be performed?

(10) Does the employer direct the order or sequence of tasks to be performed?

(11) Does the employer required regular progress reports?

(12) Is the worker paid by the hour, week, or month, rather than for the completion (or stage of completion) of the project?

(13) Does the worker work only for the employer?

(14) Does the employer pay business overhead and incidental expenses?

(15) Does the employer provide equipment, tools, and materials?

(16) Is the work performed on the employers premises or using the employers facilities?

(17) Are the workers services not available to the general public?

(18) Does the employer provide a minimum salary and therefore shield the worker from the risk of profit or loss on the job.

(19) Does the employer have the right to terminate the worker even if the job results are achieved?

(20) Is the employer required to pay the worker for time spent even if the job is not completed?

Honest answers to the above questions will help you to determine whether a worker is a contractor or an employee. Remember that job title, designation as a "contractor" within the "contract," or the degree of freedom enjoyed by the worker have no bearing on the level of your control and therefore no weight in the determination of status.

Safe Harbor Rules. The safe harbor rules provide some relief against the classification of a worker as an employee. A worker will not be deemed to be an employee (even if the Common Law test concludes otherwise) if: (1) you never treated the worker (or other workers holding substantially similar positions) as an employee for employment tax purposes; (2) you filed all employment tax and information returns consistent with the worker's classification as a contractor; and (3) a "reasonable basis" for treating the worker as a contractor exists. "Reasonable basis" safe havens include: (1) judicial precedent, published rulings, technical advice, and letter rulings; (2) results of past IRS audit that did not classify workers holding substantially similar positions as employees; and (3) longstanding and recognized industry practice.

Special Rules. As with any issue before the IRS, special rules apply to all sorts of worker groups including, but not limited to, accountants, agricultural labor, attorneys, casual labor, corporate directors and officers, domestics, family members, insurance agents, military, ministers, partners, physicians and dentists, and students. Check the specific rules if you are using these types of workers.

Wow, this is really complicated. What if I can't figure out whether I have an employee or a contractor?

If, after applying the Common Law test, you are unable to determine a worker's status, you may request a specific IRS determination by filing Form SS-8 with the district director of your IRS service center.

OK, so maybe I really do have an employee. But, all those taxes and forms, and the job is only temporary -- what's the problem with treating this worker as an independent contractor anyway?

<b>Call the worker whatever you want but, for tax purposes, treat him (her) as an employee! The IRS and the various state agencies may hit you with back taxes, interest, and penalties. They may even try to charge you with fraud. If the taxing authorities decide the worker was an employee, the worker may come back to you with claims for wages, overtime, and employee benefits.
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[Penrith]

reply

Thanks for the info.

I guess it would be easiest for me to find a payroll program or at least the information that I need to make the deductions and begin taking out taxes.

I was hoping the easiest solution which would be me not worrying about their taxes

-James