1099 contractor or regular employee

[petersonra]

Two questions.

1) Why MUST he educate the sub on his tax burden?

2) How did you get to 45%? (I understand the 2 sides of the SS tax, but that's only 15.3% and you would still pay 1/2 of that as an employee).

I don't know where that number came from either but he may be lumping in WC and UI and various other non-direct expenses in there. most employers are paying 35-50% of wages for indirect costs. That is one of the big reasons they try to get rid of employees. But it just shifts the burden to the alleged sub-contractor. having said that, I know a fair number of self employed people who have health insurance from some other entity (wife's employer, VA, etc.) so they are perfectly happy with that situation. right now health insurance for a middle aged person can run $1000 a month.

BTW, if you are careful how you structure things, you can shift profits out of your LLC to a spouse. If the spouse has hit the max SS/medicare for the year, you don't pay much SS or medicare tax. However, this will affect your SS payments when you retire.

 

[kwired]

I don't know all that many small companies that have yellow page ads these days.

My friend's father was in computers and 1099ed his buddy whom had his own company for light fill in work. All went well till NJ showed up with their "tests" for employee for subcontractor. The sub passed everything you can think of in the usual. Phone number, own insurance, own website saying such, own credentials, etc...... However guess what the state asked for to prove you are a real entity and not an employee?

Where is your phone book yellow pages ad........ No really.

PS: The true fun of a limited liability company is a series llc. Truly the wild west, accountants hate them, lawyers hate them cause of so many untested ideas that allows you to do MATRIX style running on walls with a self budding, perpetual independent, plus which state wrote them and how they interact with the state the wrote them.

though it is the kind of bussiness that typicaly would want to have such ads, I can not believe there would be a requirement to have such ads either. For one thing a business doesn't even need to have a phone these days and could make it pretty well with email, web sites, social media, etc. for communications.

One could also run a business that needs little or no advertising as you possibly contract with a single or limited number of regular clients to do whatever it is your business does. Of course if you contract with a single client, you may be looked at a little harder to see if you should be considered an employee instead of a contractor, but there are still legitimate cases where an individual is a contractor and not an employee.

 

[ramsy]

..don't know if I can do that since the helper do not have an electrical contractor license.

These matters are frequently published in State Appellate court rulings, where case precedent shows the Insurance-industry prevailing against owners that hired someone who violated license law, Workers Comp., or payroll reporting.

At the appellate level my State has ruled, a License is proof of independent-contractor status, proving the same for an unlicensed helper is not likely. The CA license board's Summer/Fall-2015 newsletter reports an epidemic of workers-comp fraud among 50% of its licensed members in all trades, certifying themselves exempt from workers comp. while using helpers on the job.

A contractor’s license may be automatically suspended by operation of CA B&P 7125.2 for worker’s comp. fraud, or for under-reported payroll. Courts also punish property owners if both; 1) the injured were unlicensed, not a statutory employee, and 2) a builders license was required, CLC § 2750.5

When the courts void insurance claims, or after contractor flight, the property owner must go after the contractor, and risk losing property to pay damages & injury claims.

 

[Sierrasparky]

These matters are frequently published in State Appellate court rulings, where case precedent shows the Insurance-industry prevailing against owners that hired someone who violated license law, Workers Comp., or payroll reporting.

At the appellate level my State has ruled, a License is proof of independent-contractor status, proving the same for an unlicensed helper is not likely. The CA license board's Summer/Fall-2015 newsletter reports an epidemic of workers-comp fraud among 50% of its licensed members in all trades, certifying themselves exempt from workers comp. while using helpers on the job.

A contractor’s license may be automatically suspended by operation of CA B&P 7125.2 for worker’s comp. fraud, or for under-reported payroll. Courts also punish property owners if both; 1) the injured were unlicensed, not a statutory employee, and 2) a builders license was required, CLC § 2750.5

When the courts void insurance claims, or after contractor flight, the property owner must go after the contractor, and risk losing property to pay damages & injury claims.

Boy all this legal mumbo jumbo from one who flout's the law!

 

[electrofelon]

These matters are frequently published in State Appellate court rulings, where case precedent shows the Insurance-industry prevailing against owners that hired someone who violated license law, Workers Comp., or payroll reporting.

At the appellate level my State has ruled, a License is proof of independent-contractor status, proving the same for an unlicensed helper is not likely. The CA license board's Summer/Fall-2015 newsletter reports an epidemic of workers-comp fraud among 50% of its licensed members in all trades, certifying themselves exempt from workers comp. while using helpers on the job.

A contractor’s license may be automatically suspended by operation of CA B&P 7125.2 for worker’s comp. fraud, or for under-reported payroll. Courts also punish property owners if both; 1) the injured were unlicensed, not a statutory employee, and 2) a builders license was required, CLC § 2750.5

When the courts void insurance claims, or after contractor flight, the property owner must go after the contractor, and risk losing property to pay damages & injury claims.

Worker's Comp: Another great Reason To Have An LLC

 

[ramsy]

How does an LLC help with Workers Comp.?

 

[electrofelon]

How does an LLC help with Workers Comp.?

In NYS, members of an LLC are not required to have workers comp coverage.

 

[kwired]

In NYS, members of an LLC are not required to have workers comp coverage.

I think most if not all places the "owner(s)" wouldn't need workers comp on themselves, it is when you have a true employee you must have coverage on those individuals.

If an individual happens to be paid under 1099 instead of W-2, and would be injured while working and expects the company to reimburse medical care expenses - that situation can end up exposing whether or not the individual was truly an employee or a contractor. I don't know all the in's and out's of corporations, LLC's but if the individual is not an employee or a subcontractor then they must be an owner, may not be a major shareholder but do have some investment in the company but instead of being on payroll they take a draw from profits, that draw may be based on what their investment level is and how much they contribute to the operation of the business though. If they submit invoices and are paid according to those, they are likely a contractor, but that is just a part of the test as to whether or not they should be considered employees or contractors.

 

[electrofelon]

I think most if not all places the "owner(s)" wouldn't need workers comp on themselves, it is when you have a true employee you must have coverage on those individuals.

If an individual happens to be paid under 1099 instead of W-2, and would be injured while working and expects the company to reimburse medical care expenses - that situation can end up exposing whether or not the individual was truly an employee or a contractor. I don't know all the in's and out's of corporations, LLC's but if the individual is not an employee or a subcontractor then they must be an owner, may not be a major shareholder but do have some investment in the company but instead of being on payroll they take a draw from profits, that draw may be based on what their investment level is and how much they contribute to the operation of the business though. If they submit invoices and are paid according to those, they are likely a contractor, but that is just a part of the test as to whether or not they should be considered employees or contractors.

I don't dispute any of that. My point is that a potential option is to not have employees, and instead have members. For example, If I wanted to hire someone, whether it be just temporary for a job or two, or long term. I just get a form from my accountant that brings that person into the llc as a member. They sign it and I hold onto it - it just modifies the operating agreement. I of course don't give them a majority control on anything. Now I just pay them their rate and that's it. The is no "payroll" workers comp, unemployment, disability, deductions, so it costs me less and they can get paid more. Of course they don't have those safety net things, but can deal with that on their own or pay into it if they choose. Again, some people find this to be a foreign concept, but it is quite common around here.

 

[petersonra]

I wonder if this has ever been tested in court. A NYS court once ruled that a Moose club member was an employee for WC purposes when he got hurt while doing some volunteer work for the club. The angle the court took was that the club offered dues discounts in exchange for work hours so he was an employee during those hours.

 

[Sierrasparky]

In CA it is my understanding that a Member of a LLC would have to be covered by workers comp also.

 

[kwired]

I don't dispute any of that. My point is that a potential option is to not have employees, and instead have members. For example, If I wanted to hire someone, whether it be just temporary for a job or two, or long term. I just get a form from my accountant that brings that person into the llc as a member. They sign it and I hold onto it - it just modifies the operating agreement. I of course don't give them a majority control on anything. Now I just pay them their rate and that's it. The is no "payroll" workers comp, unemployment, disability, deductions, so it costs me less and they can get paid more. Of course they don't have those safety net things, but can deal with that on their own or pay into it if they choose. Again, some people find this to be a foreign concept, but it is quite common around here.

What you described can also fit the description of a contractor. You did have them sign something up front, which is likely a contract in some way or another. Some instances the "contract" can make them a member of the organization, or it can just be a "subcontract" to do specific things for the organization.

I will add that if you just sign them into the organization, it may be a bigger legal issue should you decide it isn't working out and want to fire them then if they are a typical W-2 employee.

 

[petersonra]

What you described can also fit the description of a contractor. You did have them sign something up front, which is likely a contract in some way or another. Some instances the "contract" can make them a member of the organization, or it can just be a "subcontract" to do specific things for the organization.

I will add that if you just sign them into the organization, it may be a bigger legal issue should you decide it isn't working out and want to fire them then if they are a typical W-2 employee.

My understanding is that a lot of these kind of arrangements have not been well tested. personally I suspect that down the road some people using them to avoid some of these government applied taxes and fees are going to get a big surprise. It will be interesting to watch how this plays out over the next few decades.

The IRS and a number of states have already started to clamp down on the proliferation of people being paid on 1099s. I suspect no one wants to upset the apple cart and they are hoping to discourage these kind of dubious arrangements rather than just going after businesses using them on a wider basis. The thing is that these kind of federal tax debts are not dischargable in bankruptcy so there is no way to ever get rid of them if the IRS comes after you and decides you should have been paying FICA and Medicare on these guys. The other thing to remember is if the IRS decides it is tax fraud, there is no statute of limitation involved either.

 

[kwired]

The thing is that these kind of federal tax debts are not dischargable in bankruptcy so there is no way to ever get rid of them if the IRS comes after you and decides you should have been paying FICA and Medicare on these guys. The other thing to remember is if the IRS decides it is tax fraud, there is no statute of limitation involved either.

If the 1099 recipient has filed and paid their "self employment tax" there shouldn't be any tax due. If they haven't filed and paid, it could get really complicated on who owes what, but if it is determined they should have been a W-2 wage earner the bulk of everything shifts back to the employer. That don't mean there still can't be penalties though. I would think if the so called employee would want the employers share of FICA taxes back, that would have to go through a civil court case.

 

[Sierrasparky]

If the 1099 recipient has filed and paid their "self employment tax" there shouldn't be any tax due. If they haven't filed and paid, it could get really complicated on who owes what, but if it is determined they should have been a W-2 wage earner the bulk of everything shifts back to the employer. That don't mean there still can't be penalties though. I would think if the so called employee would want the employers share of FICA taxes back, that would have to go through a civil court case.

have you ever heard the employer portion of the taxes that must be paid.

 

[electrofelon]

In CA it is my understanding that a Member of a LLC would have to be covered by workers comp also.

Certainly could be a state difference. Here in NY members are not required, says right on the workers comp website. However, recently a company I do subcontract work for was audited by workers comp. They said that even tho I wasn't required to have WC, because I didnt, the other company had to have me on their policy. I am going to get a second opinion on that from my lawyer/accountant.

 

[petersonra]

This "member" thing is relatively new. Used to be that often LLCs had to be dissolved and than a new one formed to either add someone or take someone off. It is hard to know how it will play out in the courts, especially in some of the more liberal states where courts are known to make up their own laws and call it public policy.

There is some interesting experimentation being done with LLCs that are being formed to do a single project and then is dissolved when the project is complete.

 

[kwired]

have you ever heard the employer portion of the taxes that must be paid.

Yes, that is exactly what "self employment taxes" are for. So if the 1099 recipient doesn't file schedule C to report that income the red flags for IRS will start rising at that point. If they do properly file schedule C and pay self employment taxes, their social security and medicare is fully paid including what in a W-2 situation would be contributed by the employer.

If the "employee" doesn't pay self employment tax, I don't know who is in bigger trouble with IRS, but would guess more burden lies on the "employer" in most instances. The employee is still likely responsible for their share of SS and Medicare though, along with any penalties assessed. Employer could be required to reimburse employee for employer's share of taxes if employee had paid them or employee may need to sue employer for them in civil court if they do want that payment back. But even getting to this point may mean there was wrong doing on the employee's part if they accepted any kind of agreement that cause them to be paid via 1099's instead of W-2, but I still believe it is the employer that is supposed to know better and that party is who will get most if not all of the penalties for not being in compliance in this entire situation.

 

[petersonra]

Yes, that is exactly what "self employment taxes" are for. So if the 1099 recipient doesn't file schedule C to report that income the red flags for IRS will start rising at that point. If they do properly file schedule C and pay self employment taxes, their social security and medicare is fully paid including what in a W-2 situation would be contributed by the employer.

If the "employee" doesn't pay self employment tax, I don't know who is in bigger trouble with IRS, but would guess more burden lies on the "employer" in most instances. The employee is still likely responsible for their share of SS and Medicare though, along with any penalties assessed. Employer could be required to reimburse employee for employer's share of taxes if employee had paid them or employee may need to sue employer for them in civil court if they do want that payment back. But even getting to this point may mean there was wrong doing on the employee's part if they accepted any kind of agreement that cause them to be paid via 1099's instead of W-2, but I still believe it is the employer that is supposed to know better and that party is who will get most if not all of the penalties for not being in compliance in this entire situation.

My understanding of this situation is that:

The employer has to pay the employer portion of taxes on his employees regardless of whether the employee paid them as self employment taxes.
The employee would get a refund from the IRS for the portion the employer was supposed to have paid.

There is also the problem of the fact that the employer is required to withhold taxes and pay them to the IRS. I seem to recall a couple cases where employers have had to pay fines for not doing so, even when the IRS decided after the fact someone was an employee.

It appears to me that the IRS is basically avoiding dealing with this mess as best they can, which is emboldening more people to engage in dubious 1099 practices. At some point if it becomes enough of an issue, the IRS is going to have to deal with it head on and a lot of people on both sides of this issue are going to feel the pain if they have not been very careful in how they structured things, and how they actually engaged in their operations.

I suspect some kind of amnesty is going to be given so that people have a chance to pay up and straighten out their affairs with little in the way of penalties, but there is no real guarantee that will happen.

 

[Buck Parrish]

Like Dennis said , In NC you're not allowed to use 1099's . Unless the person is Licensed. The NC State Board of Electrical Contractors started this about 10 - 15 years ago. Some in and out of state contractors with NC Electrical License were hiring one guy not licensed. That guy might hire 20 more.

The work was so sloppy. On a two bedroom apartment. The bigger company would supply the material. They would pay the 1099 contractor $275. for the rough in, $250 for the trim out. Some 1099s were doing 15-20 apartments a day. First the Board tried to penalize them if you failed to many inspections. That didn't work. So that's when they implemented the no 1099s any more.
I've got to hand it to them. NC does have high standards.