Why Your Contractor is Really an Employee | Lane' J. Richards

Why Your Contractor is Really an Employee

May 23, 2018

In a previous life, I worked at Intel Corporation in a business group that kept Intel legal. Little did I know all those years slaving to meet the high demands of the corporate sector would prepare me for entrepreneurship (on so, so many levels!). Since Intel “employs” a lot of contractors, I had to know the difference between an employee and a contractor like the back of my hand.

Working in the wedding industry, you’re often faced with days (or even weeks) that you need to bring in a helping hand. Since the work is temporary, you might assume you can pay them directly without bringing them on as an employee. Whether that’s under the table (cash) or as a contractor. If you fall under this group, read on to find out why your contractor is really an employee.

IRS Common Law Rules

The IRS created a list of “Common Law Rules” which provide details around the degree of control. Those include:

  1. Behavioral: Does the company control what the worker does and how they do their job? Do you dictate when the worker is to show up to work (and when the shift ends)? Do you provide training and detailed instructions on how to do the job?
  2. Financial: Do you pay the worker directly (vs. to a company)? Do you reimburse for expenses? Do you provide tools and resources for the worker? Is the worker an individual (vs. a registered business)? Do you pay them hourly vs. a flat fee?
  3. Type of Relationship: Do you offer employee benefits such as vacation pay, workers comp insurance, etc.? Is your business relationship with the worker ongoing?

If you answered “yes” to these questions, your contractor should be classified as an employee. Realizing its easier to “pay as you go” vs. onboarding an employee can be tempting. But trust me, I’ve heard horror stories from small business owners who have had both the IRS and local agencies come after them for improper classification.

A good and easy rule of thumb is to think about a service provider you may need to hire to perform work in your home, say a plumber:

  • They provide you with an estimated time (typically a 2-hour window);
  • you pay the company (vs. them directly);
  • they perform the same work for others (without a need for a non-disclosure agreement);
  • they have their own tools and equipment;
  • and you pay them a flat fee for services.

Avoid Payroll Tax Penalties!

So, even if you only need someone ONE time and they do not meet the criteria, you’ll need to hire them as an employee. Why? Because state agencies want their money via payroll taxes (amongst other reasons)! In fact, I just met with my accountant who told me a horror story of a small business owner who paid a kid $50 for one-day of work. He was audited by the state who went through his entire books and checking register when they discovered the check. So what happened? They went after him for back payroll taxes and it ended up costing him several thousand dollars to rectify.

In another example, a planner friend mentioned she was recently audited by the State employment department. While the planner had copies of her 1099’s she issued, the auditor asked what company the contractor belonged to. Imagine the red flag that went up when the planner said the worker didn’t have an active, registered business (even a DBA). Luckily, the auditor was nice and instead of a hefty fine, she gave her a firm warning. The auditors words to the planner? “Warn your other wedding industry friends because we’re coming after them.” Yikes!

If it’s one thing Intel taught me it’s “only the paranoid survive” (by founder Andy Grove). If ever you’re in doubt, ask your attorney or accountant and they can give you the complete lowdown. Better yet, visit the IRS’s page on independent contractors where they have a nifty form (SS-8) you can complete and file with the IRS so there are no surprises.

P.S. I realize the last thing you want to deal with is payroll. Which is why I won’t keep you hanging without a payroll resource I can’t live without. I’ve been using Gusto Payroll for my rental business, Something Borrowed, for the past 3 years and absolutely LOVE it! If you sign up and run payroll (after your free trial period), you’ll get a $100 Amazon gift card. Pretty cool, huh?

Need help with hiring your first employee?

I work with specialty and vintage rental businesses large and small, helping you build and scale your business and have over 15 years of personnel and HR experience. Can I help you? Don’t take my word for it, listen to those I’ve helped in the past:

“Lane’ Richards has helped me change my business strategies and processes and now my business runs better and smarter. My company, Beautiful Event Rentals, has grown exponentially since starting the coaching. I started wedding business coaching with Lane’ because of her expertise and very apparent love for coaching – I highly recommend her!”

Cammie P., Beautiful Event Rentals, Carrollton, TX

Lane’ is an excellent teacher & mentor in the wedding coaching world. She’s helped me with everything from styling ideas to contracts & how to value myself as a wedding professional & business owner.

Emily G., Renown Rentals, St. Louis, Missouri

Want to see how I can help you and your rental business? Learn more about 1:1 mentoring, scheduling a 2-hour strategy call, or arranging a website diagnostics review. Contact me via email or call 619.577.3117 to inquire and get more details.

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